Asset Class Rotation

I was at dinner the other nite and someone mentioned Decision Moose, so I thought I would do an update on a very simple system.  I have written a lot on World Beta about cross market momentum in the past (ie asset class rotation).  Some previous posts are listed at the end of this blog. 

Anyways, below are some log equity curves for a simple rotation system.  The same five asset classes as my paper back to 1973.  Ranked on the average of the trailing 3, 6, and 12 month total returns. Rebalanced monthly.  Top 1 is all-in the top asset class, Top 2 is all-in split 50/50 between the top two asset classes, Top 3 is all-in split between the top three asset classes, etc.  Results are frictionless.  Top1 would have done around +15% last year, Top 2 -9%, and Top 3 -24%.  I think you could easily expand this to more asset classes but you would have to increase the number of holdings in line with the %ages above (ie Top 2 40% of the investable universe).

Again, I think this just captures the alpha of momentum and increases your Sharpe to the .80 area.  (Asset classes cluster around 0.20 and buy and hold around 0.40.)  There are some tweaks and improvements but this is a nice example of parameter stability – and they beat buy and hold roughly 75% of the time (and have continued to work in recent years).

Some rotation funds of various flavors.

FUNDX (Newsletter here), (Fact Sheet here)
Rydex International Rotation Fund (RYFHX), (Fact Sheet here)
Rydex Sector Rotation Fund (RYSRX), (Fact Sheet here)
DWA Technical Leaders (PDP), (Fact Sheet here)
DWA Balanced (DWAFX, DWAFX), (Fact Sheet here)
VL Industry Rotation (PYH) (Fact Sheet here)
VL Timeliness (PIV) (Fact Sheet here)
Claymore/Zack’s Country Rotation (CRO) (Fact Sheet here)
Claymore/Zack’s Sector Rotation (XRO) (Fact Sheet here)
BlackStar (study here)

Previous Posts:

You Spin Me Round

Alpha Persistence

Alpha Engines

Cross Market Mo (and here)