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Book Review: Adaptive Asset Allocation

February 29, 2016

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I recently read “Adaptive Asset Allocation” ( link to the book) by Butler, Philbrick and Gordillo of ReSolve Asset Management.  The book is the culmination of research  developed over the years by the ReSolve team towards the next generation approach of dynamic asset allocation. The core principles of this approach are the ability  to “go anywhere” and adapt to changes in the economic environment in the quest for greater risk-adjusted returns. (CSSA readers may recall a post we did a while back on adaptive asset allocation, if not it is worth a refresher along with one of the original whitepapers on AAA)    The book is extremely well-written, and the chapters are easy to read- developing the story persuasively from cover to cover.

This book is not a dense quantitative tome , but rather a summary of a coherent and rigorously developed investment philosophy that is carefully built around academic research and concepts. To that extent, Adaptive Asset Allocation is a true “tour de force” and a key contribution to the field of asset allocation theory.  Without this background, it is impossible to frame ideas properly within any trading system or tactical asset allocation model. It is far too easy to get confused over the wide range of possible approaches to portfolio management: should you use momentum? should you seek to minimize risk?  should you use long-term or short-term estimates? should you include or exclude certain asset classes? what time frame should you trade on? Ultimately the answers to these questions are driven by having a framework that neatly incorporates what input assumptions that you are confident in making versus those that you don’t know anything about. The book really helps to address these key issues in the development of trading models/systems.  Adaptive Asset Allocation also neatly ties in the natural link between an active asset allocation approach and financial planning. Much of this is both theoretical and also based on their experience working as financial advisors with wealthy clients.  The authors show that managing “volatility gremlins” with a portfolio management approach that is specifically designed to manage volatility itself is critical for investors in retirement.  Adaptive Asset Allocation is not just an investment philosophy or a quantitative approach, but rather the book proves that it is a coherent and comprehensive solution for wealth management.

Who should read the book?:  If you are a short-term trader that is looking for trading system ideas this probably isn’t for you. But if you are an investor, a portfolio manager, or a trader interested in longer frequency models, this is an essential book that will help to develop and crystallize your thinking towards asset allocation.

 

3 Comments leave one →
  1. March 1, 2016 4:16 am

    Thanks for your input. I ordered the book yesterday so good to know its a worthwhile read.

    Regards
    Oliver

  2. Raúl permalink
    March 1, 2016 6:57 am

    I’m going to buy the book and read it, I l believe that the critical differences a typical trader an a good portfolio manager (the next step for traders) is the asset allocation. What do you think about other asset allocation such as Universal Portfolios and Anticor (http://arxiv.org/pdf/1107.0036.pdf)?

    Thank you very much, David.

    Best regards,
    Raúl

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