Flexible Asset Allocation (FAA)

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The Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic Approach by Wouter J. Keller and Hugo S.van Putten (2012) backtest and live signal. For more details please see:

The FAA Strategy allocates across Price, Volatility, and Correlation Momentum.

Load historical data from Yahoo Finance:

#*****************************************************************
# Load historical data
#*****************************************************************
library(SIT)
load.packages('quantmod')

tickers = '
US.STOCKS = VTI + VTSMX
FOREIGN.STOCKS = VEU + FDIVX
EMERGING>MARKETS=EEM + VEIEX
US.10YR.GOV.BOND = IEF + VFITX
REAL.ESTATE = VNQ + VGSIX
COMMODITIES = DBC + CRB
CASH = BND + VBMFX
'

# load saved Proxies Raw Data, data.proxy.raw
load('data.proxy.raw.Rdata')

data <- new.env()

getSymbols.extra(tickers, src = 'yahoo', from = '1970-01-01', env = data, raw.data = data.proxy.raw, auto.assign = T, set.symbolnames = T, getSymbols.fn = getSymbols.fn, calendar=calendar)
  for(i in data$symbolnames) data[[i]] = adjustOHLC(data[[i]], use.Adjusted=T)
bt.prep(data, align='remove.na', dates='::')

print(last(data$prices))

	US.STOCKS	FOREIGN.STOCKS	EMERGING>MARKETS	US.10YR.GOV.BOND	REAL.ESTATE	COMMODITIES	CASH
2016-06-24	104.05	41.22	32.65	112.21	84.86	15.01	83.7

#*****************************************************************
# Setup
#*****************************************************************
data$universe = data$prices > 0
	# do not allocate to CASH
	data$universe$CASH = NA 

prices = data$prices * data$universe
	n = ncol(prices)

Code Strategy Rules:

#*****************************************************************
# Code Strategy
#******************************************************************
ret = diff(log(prices))

n.top = 3

mom.lookback = 80
vol.lookback = 80
cor.lookback = 80

weight=c(1, 0.5, 0.5)

hist.vol = sqrt(252) * bt.apply.matrix(ret, runSD, n = vol.lookback)

mom = (prices / mlag(prices, mom.lookback) - 1)[period.ends,]

#*****************************************************************
# Compute Average Correlation
#******************************************************************
avg.cor = data$weight * NA
for(i in period.ends[period.ends > cor.lookback]){
  hist = ret[(i - cor.lookback):i,]
    include.index = !is.na(colSums(hist))
  correlation = cor(hist[,include.index], use='complete.obs',method='pearson')
  avg.correlation = rowSums(correlation, na.rm=T)

  avg.cor[i,include.index] = avg.correlation
}


mom.rank = br.rank(mom)
cor.rank = br.rank(-avg.cor[period.ends,])
vol.rank = br.rank(-hist.vol[period.ends,])

avg.rank = weight[1]*mom.rank + weight[2]*vol.rank + weight[3]*cor.rank
meta.rank = br.rank(-avg.rank)

#absolute momentum filter 
weight = (meta.rank <= n.top)/rowSums(meta.rank <= n.top, na.rm=T) * (mom > 0)

# cash logic
weight$CASH = 1 - rowSums(weight,na.rm=T)

obj$weights$strategy = weight

plot of chunk plot-6

#Strategy Performance:

	strategy
Period	May1996 - Jun2016
Cagr	11.21
Sharpe	1.14
DVR	1.06
R2	0.93
Volatility	9.75
MaxDD	-16.18
Exposure	99.72
Win.Percent	63.07
Avg.Trade	0.36
Profit.Factor	2.08
Num.Trades	658

plot of chunk plot-6

#Monthly Results for strategy :

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Year	MaxDD
1996						1.3	0.2	-0.2	1.5	1.5	4.0	4.0	12.9	-1.8
1997	0.2	-0.7	-2.5	-1.3	5.9	1.5	2.3	-7.4	5.3	-0.1	-1.0	1.4	2.9	-7.4
1998	0.2	2.2	3.2	1.5	-0.6	0.1	-0.7	-3.2	2.5	-0.6	0.1	3.3	8.1	-5.8
1999	-1.7	-2.9	2.2	2.6	-3.2	4.3	-1.0	1.1	2.4	0.3	4.2	9.1	18.0	-6.7
2000	-3.5	4.8	0.6	-2.6	3.3	2.7	1.7	2.4	1.0	-1.5	3.0	0.9	13.0	-5.6
2001	0.7	-0.4	-1.3	0.2	1.0	2.3	0.9	-0.5	-0.2	0.2	-1.7	0.1	1.2	-4.8
2002	1.3	1.8	3.0	0.2	0.5	2.5	-0.9	2.9	2.8	-0.9	-0.5	1.6	15.1	-4.7
2003	2.5	0.9	-2.1	0.6	6.1	0.9	0.2	4.1	0.2	3.5	2.9	5.3	27.9	-4.4
2004	2.7	2.3	2.5	-6.6	1.7	-1.3	2.0	1.2	0.0	2.5	3.9	3.0	14.2	-7.5
2005	-0.8	1.4	-4.1	-2.3	0.5	2.6	1.3	0.4	1.3	-4.0	2.9	4.1	2.9	-8.5
2006	7.0	-2.7	3.6	2.5	-6.3	-0.8	2.2	0.6	1.3	3.3	3.0	0.8	14.7	-16.2
2007	3.3	-3.0	0.3	2.8	1.9	-0.6	-0.2	0.0	7.0	7.1	-1.4	1.8	20.0	-9.0
2008	-0.9	6.1	0.2	1.0	1.6	-0.1	-3.3	-1.7	-0.4	-2.3	5.2	5.1	10.7	-11.9
2009	-2.7	-0.7	1.8	6.3	5.7	-2.4	6.1	0.8	4.4	-2.7	5.3	0.5	24.1	-9.3
2010	-6.7	4.3	5.1	3.4	-3.5	-2.7	3.7	2.1	3.8	3.7	-1.8	4.4	16.2	-10.1
2011	1.8	4.2	0.5	4.4	-1.7	-2.7	2.3	0.2	-4.0	-0.4	0.1	2.6	7.2	-7.3
2012	4.1	1.5	-0.2	1.5	-2.7	-0.1	1.5	-0.1	0.5	-1.2	1.2	1.7	7.8	-4.6
2013	1.4	0.1	2.3	3.1	-2.3	-1.7	2.1	-2.0	0.5	2.8	0.9	0.7	7.8	-8.5
2014	-2.0	3.4	0.5	1.4	0.9	1.7	0.7	2.5	-3.7	2.1	1.9	0.6	10.3	-5.3
2015	2.8	-0.2	0.4	-2.0	-1.1	-1.9	0.4	-2.2	0.9	-0.2	-0.2	0.4	-3.0	-9.9
2016	-2.7	0.6	0.4	-0.8	1.0	0.4							-1.2	-5.3
Avg	0.3	1.1	0.8	0.8	0.4	0.3	1.1	0.0	1.4	0.7	1.6	2.6	11.0	-7.4

plot of chunk plot-6

#Trades for strategy :

strategy	weight	entry.date	exit.date	nhold	entry.price	exit.price	return
US.10YR.GOV.BOND	33.3	2015-11-30	2015-12-31	31	105.29	104.82	-0.15
REAL.ESTATE	33.3	2015-11-30	2015-12-31	31	76.74	78.14	0.61
CASH	33.3	2015-11-30	2015-12-31	31	80.57	80.43	-0.06
US.STOCKS	33.3	2015-12-31	2016-01-29	29	103.81	97.87	-1.91
REAL.ESTATE	33.3	2015-12-31	2016-01-29	29	78.14	75.46	-1.15
CASH	33.3	2015-12-31	2016-01-29	29	80.43	81.39	0.4
US.10YR.GOV.BOND	33.3	2016-01-29	2016-02-29	31	108.31	109.92	0.5
REAL.ESTATE	33.3	2016-01-29	2016-02-29	31	75.46	75.19	-0.12
CASH	33.3	2016-01-29	2016-02-29	31	81.39	82.09	0.28
US.10YR.GOV.BOND	33.3	2016-02-29	2016-03-31	31	109.92	109.85	-0.02
CASH	66.7	2016-02-29	2016-03-31	31	82.09	82.65	0.45
US.10YR.GOV.BOND	33.3	2016-03-31	2016-04-29	29	109.85	109.68	-0.05
REAL.ESTATE	33.3	2016-03-31	2016-04-29	29	83.05	81.1	-0.78
CASH	33.3	2016-03-31	2016-04-29	29	82.65	82.81	0.06
US.10YR.GOV.BOND	33.3	2016-04-29	2016-05-31	32	109.68	109.57	-0.03
REAL.ESTATE	33.3	2016-04-29	2016-05-31	32	81.1	82.92	0.75
COMMODITIES	33.3	2016-04-29	2016-05-31	32	14.58	14.71	0.3
US.STOCKS	33.3	2016-05-31	2016-06-24	24	107.34	104.05	-1.02
REAL.ESTATE	33.3	2016-05-31	2016-06-24	24	82.92	84.86	0.78
COMMODITIES	33.3	2016-05-31	2016-06-24	24	14.71	15.01	0.68

#Signals for strategy :

	US.STOCKS	FOREIGN.STOCKS	EMERGING>MARKETS	US.10YR.GOV.BOND	REAL.ESTATE	COMMODITIES	CASH
2014-10-30	33	0	0	33	33	0	0
2014-11-26	33	0	0	33	33	0	0
2014-12-30	33	0	0	33	33	0	0
2015-01-29	33	0	0	33	33	0	0
2015-02-26	33	0	0	33	33	0	0
2015-03-30	33	0	0	33	33	0	0
2015-04-29	33	0	33	33	0	0	0
2015-05-28	33	33	0	0	0	0	33
2015-06-29	0	33	0	0	0	0	67
2015-07-30	33	0	0	0	0	0	67
2015-08-28	0	0	0	33	0	0	67
2015-09-29	0	0	0	33	0	0	67
2015-10-29	33	0	0	33	33	0	0
2015-11-27	0	0	0	33	33	0	33
2015-12-30	33	0	0	0	33	0	33
2016-01-28	0	0	0	33	33	0	33
2016-02-26	0	0	0	33	0	0	67
2016-03-30	0	0	0	33	33	0	33
2016-04-28	0	0	0	33	33	33	0
2016-05-27	33	0	0	0	33	33	0

For your convenience, the Strategy-FAA report can also be downloaded and viewed the pdf format.

(this report was produced on: 2016-06-25)

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Flexible Asset Allocation (FAA)