24 Pages Posted: 8 Apr 2016 Last revised: 13 Apr 2016
Date Written: April 5, 2016
Since the financial crisis of 2008 and the recent (end of 2015) pull back, investors are searching for less risky investments. Therefore, there is a growing demand for low risk/absolute return portfolios. In this paper we describe a simple dual-momentum model (called Protective Asset Allocation or PAA) with a vigorous “crash protection” which might fit this bill. It is a tactical variation on the traditional 60/40 stock/bond portfolio where the optimal stock/bond mix is determined by multi-market breadth using dual momentum. We backtested the model with several global multi-asset ETF-proxies. Starting from Dec 1970 allows us to investigate the behavior of PAA in periods with rate hikes as well. The in-sample (Dec 1970-Dec 1992) and out-of-sample returns of the most protective variant of our PAA strategy satisfy our absolute return requirement without compromising high returns. This makes PAA an appealing alternative for a 1-year term deposit.
Keywords: Absolute return, protective momentum, dual absolute and relative momentum, 60/40, SMA, FAA, TAA
JEL Classification: C00, C10, C22, G00, G11, G10, G14
Suggested Citation: Suggested Citation
Keller, Wouter J. and Keuning, Jan Willem, Protective Asset Allocation (PAA): A Simple Momentum-Based Alternative for Term Deposits (April 5, 2016). Available at SSRN: https://ssrn.com/abstract=2759734 or http://dx.doi.org/10.2139/ssrn.2759734