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Meb Faber's Global Tactical Asset Allocation (GTAA) strategy

I see that Meb Faber will be speaking at QuantCon. This algorithm implements his Global Tactical Asset Allocation (GTAA) as documented in "A Quantitative Approach to Tactical Asset Allocation" [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 ][3] , the Feb 1 2013 edition (pp. 29). The strategy rebalances 5 asset classes (SPY, EFA, TIP, GSG, VNQ) in equal percentages as follows:

  1. BUY RULE: Buy when monthly price > 10-month SMA.
  2. SELL RULE: Sell and move to cash when monthly price < 10-month SMA.
  3. The model is only updated once a month on the last day of the month.
  4. Cash returns are NOT estimated, and margin rates are NOT applied as no leveraged models are used. (*)
  5. Taxes are not modeled.
  6. Commissions, and slippage are included. (*)
  • different from the paper.

The main goal of the strategy is implementable simplicity (not algorithmic) and to avoid drawdown over Buy and Hold, and this backtest achieves a 13% drawdown over the S&P 50% drawdown during the 2008 crash. Please double check my interpretation of the implementation and ETF selections.

Clone Algorithm
271
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Backtest from to with initial capital
Total Returns
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Alpha
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Beta
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Sharpe
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Sortino
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Max Drawdown
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Benchmark Returns
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Volatility
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Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 54db86e0fbac5809285a70c7
There was a runtime error.
10 responses

Yes! I didn't realize it was already in the 'Community'! I had searched for it, but don't know why I didn't find it. The differences are: GSG over GLD for commodities (forcing backtests to > 2006), TIP over AGG (not sure which is more representative), monthly rebalance instead of daily, 5% threshold instead of 10% threshold for rebalance. Rerunning John Chia's version results in less drawdown (8.59% < 13%) and his return to date beats the benchmark by a hair.

Clone Algorithm
185
Loading...
Backtest from to with initial capital
Total Returns
--
Alpha
--
Beta
--
Sharpe
--
Sortino
--
Max Drawdown
--
Benchmark Returns
--
Volatility
--
Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 54db99505863f56b320b6873
There was a runtime error.

Chia's version again, with cash holdings tracked:

Clone Algorithm
185
Loading...
Backtest from to with initial capital
Total Returns
--
Alpha
--
Beta
--
Sharpe
--
Sortino
--
Max Drawdown
--
Benchmark Returns
--
Volatility
--
Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month
# Backtest ID: 54dba2035863f56b320bcbe5
There was a runtime error.

So smooth! Can beating buy and hold be so simple?

If "smooth" is what you are looking for, then yes, it can be this simple. Does it ALWAYS beat buy-and-hold ? No backtest can tell you that.

@ Paul Perry,

You are right. Backtest is only 1 realization of a zillion possibilities. It can never tell me whether the future is going to look like the past. But smoothness on its own is quite commendable. It lets you plan your finances for any time horizon. Can be a brilliant retail product.

Kudos.

from 2009 to 2012 the delta between the SPY and the strategy is about the same, then after 2012 the delta decreases... Just looking at the trend I would say that the beating decreased during the last while. It prevents the downturn and that is commendable, but for the rest... I would not put my money in when it looks like this...

Was it able to prevent the 2001 downturn. It's nothing out of the world for an investor driven by greed. But a risk averse investors who wants a bigger return than what treasuries can offer, would love it.

Meb himself offers a retail product that implements something near this strategy: GTAA . As I see it, the advantage of this strategy is not the upside, as it doesn't beat the market, but avoiding the downside. It simply implements golden-cross timing on top of the broadest set of asset classes.

Faber's firm no longer advises GTAA, but he has newer alternatives such as GMOM and GAA.