Tactical asset allocation

Tactical asset allocation (TAA) 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 strategies can be either discretionary or systematic.

In discretionary tactical asset allocation strategies, an investor modifies his asset allocation according to the valuation of the markets in which they are invested. Thus, someone who invested heavily in might reduce their position when they perceive that other securities, such as bonds, are poised to outperform stocks. Unlike , in which the investor predicts which individual stocks will perform well, tactical asset allocation involves only judgments of the future return of complete markets or sectors. As such, some practitioners perceive it as a natural supplement to mutual fund investing, including passive management investing.

Systematic tactical asset allocation strategies use a quantitative investment model to systematically exploit inefficiencies or temporary imbalances in equilibrium values among different asset classes. They are often based on known financial market anomalies (inefficiencies) that are supported by academic and practitioner research. For example, many systematic TAA strategies use quantitative Trend Following or Relative Strength techniques to produce excess returns. These both aim to capitalize on momentum, a well-known market anomaly.

The efficient-market hypothesis would imply that tactical asset allocation cannot increase risk-adjusted returns, since markets are already efficiently priced. If a tactical approach were found that could increase returns without an increase in risk, investors would flock to that inefficiency, and the advantage would go away. Many investors do not accept this hypothesis, however, and believe that inefficiencies in the market persist and can be exploited.

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