TY - JOUR T1 - Dynamic Allocation or Diversification: <em>A Regime-Based Approach to Multiple Assets</em> JF - The Journal of Portfolio Management SP - 62 LP - 73 DO - 10.3905/jpm.2018.44.2.062 VL - 44 IS - 2 AU - Peter Nystrup AU - Bo William Hansen AU - Henrik Olejasz Larsen AU - Henrik Madsen AU - Erik Lindström Y1 - 2017/12/31 UR - https://pm-research.com/content/44/2/62.abstract N2 - This article investigates whether regime-based asset allocation can effectively respond to changes in financial regimes at the portfolio level in an effort to provide better long-term results when compared to a static 60/40 benchmark. The potential benefit from taking large positions in a few assets at a time comes at the cost of reduced diversification. The authors analyze this trade-off in a multi-asset universe with great potential for static diversification. The regime-based approach is centered around a regime-switching model with time-varying parameters that can match financial markets’ behavior and a new, more intuitive way of inferring the hidden market regimes. The empirical results show that regime-based asset allocation is profitable, even when compared to a diversified benchmark portfolio. The results are robust because they are based on available market data with no assumptions about forecasting skills.TOPIC: Portfolio construction ER -