Global tactical asset allocation
Encyclopedia
Global Tactical Asset Allocation, or GTAA, is a top-down investment
strategy that attempts to exploit short-term mis-pricings among a global set of assets. The strategy focuses on general movements in the market rather than on performance of individual securities.
hedge fund
s and tactical asset allocation
(TAA). Global macro hedge funds, like GTAA, seek to profit from taking positions
in major world equity
, bond
or currency markets. However, the two differ in the fact that global macro has been characterized by large, undiversified bets, while modern GTAA strategies are generally well-diversified and operate with risk controls. TAA decisions undertaken by managers of multi-asset funds, like GTAA decisions, are intended to enhance investment outcomes by overweighting and underweighting asset classes
based on their expected performance over relatively short time periods (usually 3 to 6 months). While TAA, within multi-asset funds, is restricted to the asset classes contained in the fund's strategic asset allocation, GTAA strategies enjoys the privilege of accessing a broader opportunity set.
holdings moves away from the strategic benchmark due to differences in asset class returns, due to changes in asset valuation, cash holdings, currency deviations from stock
selection, unintentional country deviations within underlying stock/bond portfolios, manager of benchmark transitions, and contributions to and redemptions from the portfolio. The overlay element of GTAA program is designed to capture excess return through intentional, opportunistic, long
and short positions in asset classes and countries. The GTAA strategy can be viewed as making two major types of decisions: The first type is asset class timing, including stocks vs. bonds vs. cash, small-cap
vs. large-cap stocks, value vs. growth stocks, emerging vs. developed stocks and bonds, etc. This kind of decision making is often referred to as TAA. The second type of decision is known as country or sector decisions within asset classes, including country selection in developed and emerging equity, as well as fixed income and currency markets. These are the global relative-value decisions which give meaning to the "G" in GTAA and distinguish the strategy from traditional market timing.
sources, and GTAA represents just that, for myriad reasons: the performance differentials between asset classes are frequently substantial, the derivative
instruments used in GTAA are, for the most part, highly liquid
and transaction cost
s are low. The volume of assets managed with a focus on relative performance of asset classes is low compared to that focused on finding opportunities within asset classes, and a number of managers with very impressive teams, processes and track records can be identified. Furthermore, the analysis and decision making involved in GTAA is focused on cross-market comparisons which proves to differ from the comparison of securities within given markets. Accordingly, GTAA should be a good diversifier, particularly within an alpha portfolio.
GTAA strategies provide investors with a series of exposures that may not otherwise be prevalent in their portfolios. Managing these exposures provides an opportunity for the generation of returns that share low correlations with other sources of active return, and they can also be expected to lead to more reliable added value.
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
strategy that attempts to exploit short-term mis-pricings among a global set of assets. The strategy focuses on general movements in the market rather than on performance of individual securities.
Hedge funds and asset allocation
GTAA is believed to be derived from, and share some characteristics of, global macroGlobal macro
Global Macro is defined as the strategy of investing, on a large scale, around the world using economic theory to justify the decision making process...
hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s and tactical asset allocation
Tactical asset allocation
Tactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing...
(TAA). Global macro hedge funds, like GTAA, seek to profit from taking positions
Position (finance)
In financial trading, a position is a binding commitment to buy or sell a given amount of financial instruments, such as securities, currencies or commodities, for a given price....
in major world equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
, bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
or currency markets. However, the two differ in the fact that global macro has been characterized by large, undiversified bets, while modern GTAA strategies are generally well-diversified and operate with risk controls. TAA decisions undertaken by managers of multi-asset funds, like GTAA decisions, are intended to enhance investment outcomes by overweighting and underweighting asset classes
Asset allocation
Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, goals and investment time frame.-Description:...
based on their expected performance over relatively short time periods (usually 3 to 6 months). While TAA, within multi-asset funds, is restricted to the asset classes contained in the fund's strategic asset allocation, GTAA strategies enjoys the privilege of accessing a broader opportunity set.
Strategies
The modern global tactical asset allocation program is composed of two separate strategies: strategic rebalancing and overlay. The strategic rebalancing element of GTAA program is designed to remove any unintentional asset allocation risk which can be caused by various factors, including: drift risk, which occurs when the value of underlying portfolioPortfolio (finance)
Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
holdings moves away from the strategic benchmark due to differences in asset class returns, due to changes in asset valuation, cash holdings, currency deviations from stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
selection, unintentional country deviations within underlying stock/bond portfolios, manager of benchmark transitions, and contributions to and redemptions from the portfolio. The overlay element of GTAA program is designed to capture excess return through intentional, opportunistic, long
Long (finance)
In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with...
and short positions in asset classes and countries. The GTAA strategy can be viewed as making two major types of decisions: The first type is asset class timing, including stocks vs. bonds vs. cash, small-cap
Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
vs. large-cap stocks, value vs. growth stocks, emerging vs. developed stocks and bonds, etc. This kind of decision making is often referred to as TAA. The second type of decision is known as country or sector decisions within asset classes, including country selection in developed and emerging equity, as well as fixed income and currency markets. These are the global relative-value decisions which give meaning to the "G" in GTAA and distinguish the strategy from traditional market timing.
Portfolios
It is widely known that many institutional investment portfolios remain dominated by equity and interest rate risk, and that these allocations tend to remain motionless regardless of market conditions. Therefore, there is reason to establish a portfolio of alternative alphaAlpha (investment)
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers' performances...
sources, and GTAA represents just that, for myriad reasons: the performance differentials between asset classes are frequently substantial, the derivative
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
instruments used in GTAA are, for the most part, highly liquid
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
and transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s are low. The volume of assets managed with a focus on relative performance of asset classes is low compared to that focused on finding opportunities within asset classes, and a number of managers with very impressive teams, processes and track records can be identified. Furthermore, the analysis and decision making involved in GTAA is focused on cross-market comparisons which proves to differ from the comparison of securities within given markets. Accordingly, GTAA should be a good diversifier, particularly within an alpha portfolio.
GTAA strategies provide investors with a series of exposures that may not otherwise be prevalent in their portfolios. Managing these exposures provides an opportunity for the generation of returns that share low correlations with other sources of active return, and they can also be expected to lead to more reliable added value.