Adaptive Multi-Factor Allocation

Although factor allocation approaches based on simple diversification techniques such as equal-weight or risk parity are transparent and have performed well historically, some investors, such as valuation-sensitive or macro-sensitive investors, utilize a dynamic approach by adapting factor allocations to be more consistent with their strategic or tactical asset allocation process. An adaptive approach aims to strike a balance between a pure single factor timing strategy and the diversification effects of a multi-factor allocation strategy. We discuss a framework that aims to adapt multi-factor allocations to changing market environments while seeking to preserve some of the diversification benefits of multi-factor investing.