Hybrid Asset Allocation

Hybrid Asset Allocation (HAA) represents an innovative strategy that integrates the established concept of dual momentum with a unique 'canary' momentum component. Dual momentum relies on monitoring price trends in assets and encompasses both absolute (tracking the trend) and relative (cross-sectional) momentum. In contrast to the conventional dual momentum framework, HAA introduces an additional layer of protection against market crashes at the portfolio level, which hinges on a singular canary asset within the protective (canary) universe. HAA permits investments in offensive assets exclusively when the canary asset is in an upward trend, and it swiftly switches entirely to defensive assets when this particular asset ceases its upward trend, maintaining this stance as long as the canary asset remains in a downward trend.

Strategy current allocation

Hybrid Asset Allocation Equity Curve

Hybrid Asset Allocation strategy statistics

HAA employs a consistent momentum measurement approach across its strategy, effectively capturing momentum across both short and long-term periods.

Momentum = unweighted average of an asset’s 1, 3, 6 and 12-month % return

This straightforward approach closely aligns with several other strategies in our monitoring, such as Meb Faber's well-known GTAA 13 and Agg 3/6, as well as Brian Livingston's Papa Bear.
The trading rules for Hybrid Asset allocation is the following:

1. Calculate the momentum of US Treasury Inflation-Protected Securities (TIPS, ETF: TIP) at the end of each month to gauge their performance. TIPS serve as a key indicator, helping us decide whether to allocate assets to either an aggressive or defensive portfolio. Historically, since 1971, simulated TIPS momentum has shown positive results approximately 86% of the time, indicating that the majority of instances have led to an allocation in favor of the aggressive asset portfolio.
2. In the event of a positive TIPS momentum, the strategy entails selecting the top-performing assets from the offensive asset pool. This universe includes US large-cap stocks (SPY), US small-cap stocks (IWM), developed international stocks (EFA), emerging market stocks (EEM), US real estate (VNQ), commodities (PDBC), intermediate-term US Treasuries (IEF), and long-term US Treasuries (TLT). Among these options, the four assets with the strongest positive momentum are chosen.
   For each of these selected assets, when their momentum remains positive, 25% of the portfolio is allocated to them. If, however, their momentum turns negative, the corresponding portion of the portfolio is redirected to either intermediate-term US Treasuries (IEF) or cash, depending on which of the two has the highest momentum. It's important to clarify that US T-Bills serve as a substitute for cash, reflecting cash's momentum.
   This investment approach is commonly referred to as "dual momentum," requiring assets to demonstrate not only positive momentum over time (referred to as "time series momentum") but also superior momentum compared to alternative assets (known as "cross-sectional momentum").
   It's worth noting that, even though commodities and treasuries are typically seen as defensive assets, the offensive portfolio maintains diversification in many cases.
3. When the momentum of TIPS is negative, the recommended strategy is to allocate the entire portfolio to either intermediate-term US Treasuries (IEF) or cash, depending on which one exhibits the stronger momentum.
4. Every trade is carried out when the market closes. Maintain each trade until the final trading day of the subsequent month. Reallocate assets on a monthly basis, even if there are no indications of changes.

Hybrid Asset Allocation returns