In a previous report we introduced a strategic asset allocation model, based on the skill of the active manager, to allocate assets between active and passive managers. The benefit of this model is that, given a level of risk aversion of the investor to active management, it reduces tracking error and relative downside risk, whilst maintaining the information ratio in-line with that of the active-only strategy.
In order to generate additional alpha for the strategic allocation, a tactical asset allocation model is derived based on the quantitative modelling of business cycles. This type of probabilistic model will increase alpha relative to the strategic allocation, whilst maintaining the tracking error.
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