Home » Finance » Investing

One Way To Use Active-Beta Strategies

Jun 11, 2008
Active Beta is our term for a systematic passive way to enhance returns by capturing risk premia and manage risk in order to outperform your benchmark.
We have all read Triumph Of The Optimists, Pioneering Portfolio Management, and the Chicago school of thought on earning risk premia and the benefits of buy and hold. Well our team at The Macro Trader is here to outperform. We do this by combining the best of academia with the best of real world global macro traders. We diversify using multiple asset classes, strategies, and time frames. We also control risk using strict stop loss and portfolio rules so that we are never risking too much.

With those rules and procedures in place we have two basic types of trades. We have alpha and active beta trades. The alpha are there to produce absolute returns over time independent of our benchmarks. We can be long oil, short rice, long consumer staples, short technology, and long the Yen. All of these have different drivers and the research behind each one is independent of each other. Basically the research for these trades is independent of any benchmark, and are put on solely to generate alpha. Our other type of trade is active beta. These positions are typically longer term in nature and are trying to capture risk premia. We know that over the long term being long equities and fixed income generates inflation beating gains both in theory and in practice.

So why is this so special? Well buy and hold periodically has very large losses. Yes, over the long term the gains are large but in the medium term that can last ten years or more at a time it can be negative. What we have done is incorporate several long term timing models in order to help mitigate risk and improve our long term risk-to-reward ratio. Basically we are in the market when conditions are favorable and out when they are not. Doing this over time allows us to catch most of the upside gains in the market while avoiding most of the losses.

Our model allocates X% for each system that is positive on equities or fixed income. In fixed income for instance we currently have 50% of our portfolio marked towards active beta and have five systems. If one is positive we allocate 10% of the portfolio. If all five are positive we allocate the full 50%. After experimenting with several allocation procedures we have found that simpler in this case is better.

Over time using active beta along side active alpha strategies can help boost overall portfolio gains dramatically. It also helps put more money to work when you might otherwise be coming up dry for good trade ideas. Right now we run this in our fixed income and equities portfolios and in the next few months we will add in commodities and currencies as we have found multiple ways to capture the risk premia built into these markets.
About the Author
David Taggart is editor of The Macro Trader newsletter. The Macro Trader covers US Equities, Global Equities, Fixed Income, Currencies, and Precious Metals. Twice a month you get a 12-25 page report where we address the economy, each asset class, and usually have multiple trade ideas that we track in our model portfolios. The Macro Trader
Rating:
Please Rate:
(Average: Not rated)
Views: 155
Print Email Report Share
Article Categories
    • Artists
    • Gambling
    • Humanities
    • Humor
    • Movies
    • Music
    • Photography
    • Tattoos
    • Television
    • Classic Cars
    • Motorcycles
    • Recreational Vehicles
    • SUVs
    • Trucks
    • Vans
    • Branding
    • Business Opportunities
    • Careers and Jobs
    • Corporate
    • Customer Service
    • Direct Mail
    • Entrepreneurship
    • Ethics
    • Financing
    • Franchising
    • Home-Based Business
    • Human Resources
    • Import and Export
    • Leadership
    • Management
    • Market Research
    • Marketing and Advertising
    • Negotiation
    • Network Marketing
    • Networking
    • Organizational
    • Presentation
    • Project Management
    • Public Relations
    • Small Business
    • Strategic Planning
    • Team Building
    • Telemarketing
    • Training
    • Data Recovery
    • Databases
    • Games
    • Hardware
    • Networks
    • Operating Systems
    • Programming
    • Security
    • Software
    • Spyware and Viruses
    • Ask an Expert
    • College and University
    • Home Schooling
    • K-12
    • Languages
    • Online Education
    • Psychology
    • Coffee
    • Cooking
    • Gourmet
    • Recipes
    • Wine and Spirits
    • Acne
    • Aerobics
    • Alternative Medicine
    • Beauty
    • Cancer
    • Cosmetics
    • Depression
    • Diabetes
    • Diseases and Conditions
    • Fitness Equipment
    • Fitness
    • Hair Loss
    • Heart Disease
    • Medicine
    • Men's Health
    • Muscle Building
    • Nutrition
    • Skin Care
    • Supplements and Vitamins
    • Weight Loss
    • Women's Health
    • Yoga
    • Arts and Crafts
    • Babies
    • Collecting
    • Elderly Care
    • Genealogy
    • Hobbies
    • Parenting
    • Pets
    • Pregnancy
    • Woodworking
    • Feng Shui
    • Gardening
    • Home Appliances
    • Home Security
    • Interior Design
    • Landscaping
    • Affiliate Programs
    • Article Marketing
    • Auctions
    • Audio
    • Banner Advertising
    • Blogging
    • Broadband
    • Domain Names
    • E-Books
    • E-Commerce
    • Email Marketing
    • Ezines and Newsletters
    • Forums
    • Internet Marketing
    • Link Popularity
    • Pay-Per-Click
    • Podcasting
    • RSS
    • Search Engine Marketing
    • Search Engine Optimization
    • Security
    • Social Media
    • Spam
    • Video
    • Viral Marketing
    • Web Design
    • Web Development
    • Web Hosting
    • Copyright
    • Cyber Law
    • Intellectual Property
    • National, State, Local
    • Patents
    • Regulatory Compliance
    • Trademarks
    • Buying
    • Selling
    • Baseball
    • Basketball
    • Boating
    • Cycling
    • Extreme Sports
    • Fishing
    • Football
    • Golf
    • Hockey
    • Hunting
    • Martial Arts
    • Running
    • Scuba Diving
    • Soccer
    • Swimming
    • Tennis
    • Dating
    • Divorce
    • Marriage
    • Weddings
    • Astrology
    • Buddhism
    • Christianity
    • Faith
    • Hinduism
    • Islam
    • Judaism
    • Meditation
    • Metaphysical
    • New Age
    • Cable and Satellite TV
    • Cell Phones
    • Communication
    • Gadgets and Gizmos
    • GPS
    • Satellite Radio
    • Video Conferencing
    • VoIP
    • Addictions
    • Coaching
    • Goal Setting
    • Motivational
    • Stress Management
    • Time Management
    • Clothing
    • Electronics
    • Fashion
    • Gifts
    • Jewelry
    • Causes and Organizations
    • Environment
    • History
    • Holidays
    • Men's Issues
    • Nature
    • Philosophy
    • Politics
    • Women's Issues
    • World Affairs
    • Air Travel
    • Camping
    • Cruises
    • Destinations
    • Outdoors
    • Article Writing
    • Book Reviews
    • Copywriting
    • Fiction
    • Non-Fiction
    • Poetry
    • Quotes
    • Screenplay
    • Tools and Resources