Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes

Abstract

Global tactical asset allocation (GTAA) strategies across a broad range of asset classes are explored in this article. In contrast to market timing for single asset classes and tactical allocation across similar assets, this topic has received little attention in the existing literature. The main finding documented in this article is that momentum and value strategies applied to GTAA across 12 asset classes deliver statistically and economically significant abnormal returns. For a long top-quartile and short bottom-quartile portfolio based on a combination of momentum and value signals, the authors report a return of 12% per annum over the 1986–2007 period. Performance is stable over time, is also present in an out-of-sample period, and is sufficiently high to overcome transaction costs in practice. The return cannot be explained by potential structural biases toward asset classes with high risk premiums, nor by the Fama–French and Carhart hedge factors. The authors argue that financial markets may be macroinefficient due to insufficient “smart money” being available to arbitrage away mispricing effects.

TOPICS: VAR and use of alternative risk measures of trading risk, equity portfolio management, analysis of individual factors/risk premia