Journal of Investment Strategies

Risk.net

Market crises and the 1/N asset-allocation strategy

Marco Escobar, Michael Mitterreiter, David Saunders, Luis Seco and Rudi Zagst

ABSTRACT

We consider portfolio management strategies where the investment style switches based on the value of a crisis indicator. A variety of strategies are considered in historical backtests on different data sets. Our findings show that certain simple switching strategies statistically significantly outperform the equally weighted portfolio with respect to the Sharpe and Omega ratios. In our backtest, the 1/N strategy and equal-risk contribution portfolio perform best during "normal" times. On the other hand, during turbulent times, risk considerations seem to play a major role, leading to minimum variance as the preferred strategy.

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