Trend Aggregation

An Advanced Approach to Tactical Asset Allocation

Trend Aggregation strategies combine intermediate-term momentum methodologies with short-term countertrend methodologies.

Momentum-based analysis keeps portfolios positioned in stocks during market upturns and in bonds and/or cash during market downturns. Countertrend-based approaches constantly judge whether markets are overbought, oversold, or at equilibrium. Overbought conditions would lead to a decrease in stock positions, while oversold conditions would lead to an increase in stock positions.

This diversified approach varies the stock market exposure of each strategy according to the current intermediate-term market trend and short-term market condition.

Tactical Asset Allocation (TAA) is becoming more popular as investors prefer a methodology that strives to protect from market downside while still participating in market upside. Unfortunately, many tactical methodologies fail to protect investors in all markets. Traditional tactical management styles do well in a straight up or straight down market, but tend to struggle to perform well in choppy markets. Trend Aggregation differentiates from a traditional tactical style by having well-defined strategies for all market climates.

Trend Aggregation is a multi-dimensional strategy that may adapt to and perform well in all types of market environments.

This involves combining methodologies that have different uncorrelated return streams, such as intermediate-term momentum methodologies and short-term countertrend methodologies.

Trend Aggregation methodologies may protect against large losses during market downturns, while still positioning investors for gains when the market is trending upward. This management style analyzes trends, countertrends and fundamental statistics, positioning investments according to confirmed information from the markets. The Trend Aggregation approach includes a strategy not only for markets with a clearly defined trend, but also for choppy, directionless markets.

Traditional tactical management styles do well in straight up or straight down markets, but tend to struggle to perform well in choppy markets. Trend Aggregation tends to do well in all markets.

Traditional tactical asset allocation may protect from losses due to a specific methodology, but any one methodology can go in and out of favor. A momentum methodology, for example, relies on whatever asset class happens to be strong, remaining strong for a long enough period to profit. During choppy market environments, market leadership will often vary from month to month with no discernible trend to latch onto.

There are typically three types of markets:

• Markets that go up in a fairly straight line
• Markets that go down in a fairly straight line
• Choppy markets that could go in either direction

In a traditional asset allocation framework, investors treat each market the same: they ride the bull market up, the bear market down, and move up and down with the choppy market, hoping for a positive result.

In a traditional tactical approach, an investor participates in most of the returns of a bull market and avoids most of the downside of a Bear Market. However, choppy markets present a problem as there is no defined trend for the tactical investor to follow.

When using a Trend Aggregation approach, each type of market is handled differently. In bull markets, investors are mostly or completely in stocks. In bear markets, investors are completely out of stocks, but have the ability to participate in bear market rallies through countertrend methodologies. In choppy markets, investors use a countertrend and/or fundamental approach to make money from market overreactions.