Simple and Effective Market Timing with Tactical Asset Allocation

The mutual fund is a fast growing, flexible and sizely attainable product, hence make it as favourable choice for the investors. As in other developing countries, however, the management of the fund invested in mutual fund is done by pointed fund manager. This paper raises and answers the question of how efficient the fund management is. This paper ustilizes the decomposition return model on the monthly data set from 2002-2006 in Indonesia. The model derived, enable us to trace and decompose the management performance into (i) the allocation policy skill, (ii) the security selection skill and (iii) the market timing strategy or the tactical asset allocation abilty.The model estimation result shows significant management capabilities on allocating the fund into suitable asset class. We record that the best asset allocation policy was on February 2002, June 2004, August 2004 and February 2006. Inline with this, another result shows the negatif contribution of the short term-tactical asset allocation as conformed by several previous studies; Treynor-Mazuy (1996), Wardhani (2003), and Henriksson (1984) among others. There is an exception for February 2006 where a successful market timing strategy contributed an additional 7.34% return. The security selection strategy is confirmed to have a positive and significant impact on the mutual fund performance. During the observation period, the best security selection strategy was achieved on February, March and July 2002, September 2003, and March, October, and December 2005. For these certain period, the security selection activities gave more than 2% additional monthly return.The policy implication is straightforward; a more intensively monitoring on the implementation of the planned asset allocation to give a safer financial investment environment for the investors. This paper also suggest the investment manager to provide a sufficient information about the portfolio’s risk profile. Our quantitative description has shown a large varieties both on return and risk across the mutual fund manager showing their varied risk taking behaviour, on which the investor has a right to know.JEL Classification: H54, G11, G31, O16Keywords: Mutual fund, asset allocation, security selection, market timing, period specific estimation, financial investment

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Using VIX to Dynamically Hedge Portfolio Risk

GIS Business ◽

10.26643/gis.v13i3.3289 ◽

1970 ◽

Vol 13 (3) ◽

pp. 15-22

Author(s):

Richard Cloutier

Keyword(s):

Asset Allocation ◽

Market Timing ◽

Investment Strategy ◽

Market Risk ◽

Portfolio Risk ◽

Dynamic Hedging ◽

Hedging Strategy ◽

Tactical Asset Allocation ◽

Asset Class ◽

Timing Strategies

Many investors accept buy and hold as their long-term investment strategy. However, during periods of heightened risk, staying disciplined can be problematic. Alternatively, market timing appeals to our emotions but is very difficult to employ successfully. Between these two extremes lies tactical asset allocation, where limited variances are allowed to take advantage of market conditions. Dynamic hedging is a form of tactical asset allocation. Instead of relying on future predictions of asset class returns, dynamic hedging strives to reduce portfolio risk when market risk is elevated. This paper presents a dynamic hedging strategy developed to accomplish this goal. It uses VIXs normal trading range to assess market risk. When VIX trades above its normal trading range and the upper Bollinger band, the dynamic hedging strategy is applied. The result is that portfolio risk is lowered when market risk is extreme. The application of this strategy provides better returns, lower volatility, and better downside protection than a strategic buy and hold allocation. It also avoids the deployment problems associated with market timing strategies.

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A tactical asset allocation strategy that exploits variations in VIX

Investment Management and Financial Innovations ◽

10.21511/imfi.14(1).2017.03 ◽

2017 ◽

Vol 14 (1) ◽

pp. 27-34

Author(s):

Richard Cloutier ◽

Arsen Djatej ◽

Dean Kiefer

Keyword(s):

Asset Allocation ◽

Market Timing ◽

Allocation Strategy ◽

Market Conditions ◽

Volatility Index ◽

Tactical Asset Allocation ◽

Asset Classes ◽

Strategic Allocation ◽

Timing Strategies ◽

Daily Returns

Buy and hold strategies make staying disciplined difficult for investors, especially given the variability of returns for different asset classes/strategies during divergent market conditions. Market timing strategies, on the other hand, present significant theoretical benefits, but in reality these benefits are difficult to obtain. Tactical asset allocation, where limited deviations from the strategic allocation are allowed permits the portfolio manager to take advantage of market conditions fits between these two extremes. The authors correlate daily returns for each of eighteen separate asset classes typically used in diversified institutional portfolios and daily closing values of the VIX (the ticker symbol for the Chicago Board Options Exchange Volatility Index). This information is used to select those classes whose returns are most responsive to the level of the VIX. Portfolio allocations for eight selected asset classes are revised depending on the level of the VIX at the daily close of the market. The portfolio is rebalanced on the business day following the day the VIX hits the trigger value. The VIX tactical allocation overlay yields an increase in return over the buy and hold portfolio of approximately 38 basis points. The authors conclude that the tactical asset allocation strategy based on the level of VIX provides a higher return than the neutral buy and hold allocation with a higher Sharpe ratio and lower volatility.

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