Capital Defender Asset Allocation

Investors are always looking for ways to balance risk and return to meet their financial objectives. There is generally a trade-off between capturing returns and a willingness to accept downside volatility. Seeking higher returns generally coincides with higher volatility. However, there a variety of investing styles that look to address this trade-off. One approach is to use momentum investing. Momentum is based on the premise that rising prices and upward trends tend to persist over time. There is a wide array of research that supports this.

We have implemented a strategy that uses momentum and breadth, along with a tactical hedge, to determine an allocation that we believe will balance growth opportunities and capital preservation.

It begins with measuring momentum in 12 major risk asset classes including equities, fixed income, and commodities monthly. We then measure the breadth, which tells us how strong the momentum is. Based on the breadth, we determine how much to allocate to the protection asset, U.S. Treasuries. The remaining portion is equally weighted across the 6 risk asset classes with the highest momentum.

Since the scoring is done monthly, this leaves an investor at risk if there is a sharp mid-month market reversal. To address this risk a tactical hedge can be implemented. A variety of macroeconomic indicators are utilized to determine if a hedge should be used. Generally, the hedges are held for a short time.