Introducing Hybrid Asset Allocation (HAA)

  • HAA aims to offer retail investors a tactical asset allocation strategy that is both balanced and aggressive at the same time.
  • HAA’s hybrid approach combines traditional dual momentum with canary momentum which results in robust crash protection with low cash-fractions.
  • HAA effectively selects assets only when they are most likely to appreciate.
  • HAA’s ability to obtain positive returns consistently is demonstrated by backtesting the strategy for over 50+ years covering various economic regimes.

Hybrid Asset Allocation (HAA) is a novel approach which combines “traditional” dual momentum with “canary” momentum. Dual momentum is based on the concept of assets price trends and consists of absolute (trend following) and relative (cross-sectional) momentum. In addition to the traditional dual momentum framework HAA adds an extra layer for crash protection at the portfolio level based on a single canary asset in the protective (or canary) universe. HAA allows only for offensive investments when the canary asset is uptrending and switches in full to defensive investments if and for as long as this asset is not uptrending. Interested readers are referred to our paper published on SSRN which offers a comprehensive explanation of the HAA methodology including explanations of the used jargon and abbreviations.

Strategy layout

HAA effectively utilizes the dual momentum framework for harvesting risk premia in financial markets by only allocating capital to assets when they are most likely to appreciate. To this effect three different universes are deployed: a protective, an offensive, and a defensive universe. 

First for early crash warning the trend of the overall market is assessed through a single canary asset, for which we have taken into account the recent (2022) stagflation-like regime with low equity growth and rising yields/inflation, including possible recessions by ‘inverted- yield-curves’ from FED actions like interest hikes and tapering. Hence our choice for HAA’s dedicated canary asset needs to be sensitive not only to rising yields but to rising (expected) inflation too. When the canary momentum is positive, cross-sectional relative strength momentum is used for selecting the best assets with the highest performance while trend-following absolute momentum reduces potential drawdown by replacing best but “bad” (non-positive) risky assets to a safe harbor short-term or intermediate-term treasury bond fund, as is fully the case when canary momentum is “bad”. For all three universes one and the same momentum filter is applied.

The objective of HAA was to design an investment strategy that is both balanced and aggressive at the same time, while specifically aiming for low cash-fractions despite robust crash protection. We had to consider that small top sizes happen to be more aggressive but less balanced, while smaller universes tend to improve the effectiveness of absolute momentum based crash protection. To combine these opposite characteristics, we found a top size of four assets out of four different financial asset-classes with two assets per class for broad diversification to be a good compromise.