TAA - Is It Applicable to Hedge Funds?

The TAA (Tactical Asset Allocation) framework implies constructing investment portfolios based on asset classes of underlying instruments and short-term performance forecasting of the corresponding indices. Originated from the traditional asset classes, TAA is often used for hedge FoF construction. However, when applied to alternative investments, it presents a highly misleading concept:

  • Fund managers may use multiple strategies, which makes it difficult to categorize
  • The whole TAA framework relies on the style-weighted allocation (read index-weighted allocation) that predetermines allocation across individual funds. Since the majority of hedge funds are not correlated with their corresponding indices, the applicability of the TAA becomes questionable.
The TAA framework should not be applied for constructing portfolios of hedge funds (hedge fund of funds).

 

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