What is Hybrid Asset Allocation (HAA) and how does it work, with an example
Hybrid Asset Allocation (HAA) is a tactical asset allocation strategy published in 2023 by Wouter Keller and Jan Willem Keuning. Its "Balanced" version is the one that has become popular among investors looking for a diversified portfolio that, while staying invested, steps away from risk when the environment gets complicated.
The problem it tries to solve
The momentum strategies of the previous decade relied on bonds rising when stocks fell. In 2022 that failed: inflation sent rates soaring, stocks and bonds fell together and a 60/40 portfolio (S&P 500 and 7-10 year bonds) closed the year at -17%. Keller and Keuning asked how to detect a "rising rates and inflation" environment in time and step out of risk.
Their answer was to watch a single asset: inflation-linked bonds (TIPS). If their trend deteriorates, it is the signal to flee.
How the signal is calculated, in four steps
- Momentum of each asset: the average of its total return over 1, 3, 6 and 12 months.
- Canary: if TIP's momentum is positive, investing in risk is allowed; if not, it is not.
- Selection: among 8 assets (SPY, IWM, VWO, VEA, VNQ, DBC, IEF and TLT), the 4 with the most momentum are chosen, at 25% each.
- Protection: chosen assets with negative momentum are swapped for BIL (cash) or IEF (Treasury bonds), whichever has more momentum.
See the calculation with this month's data on the HAA Balanced sheet.
A simple example
Imagine these momentum figures at month-end:
| Asset | Momentum |
|---|---|
| TIP (canary) | +0.8% |
| SPY | +5.0% |
| VEA | +3.0% |
| VWO | +1.5% |
| IEF | +0.5% |
| TLT | −0.2% |
| VNQ | −1.0% |
| DBC | −2.0% |
| IWM | −3.0% |
The canary is positive, so offensive mode applies. The four best are SPY, VEA, VWO and IEF, all with positive momentum: 25% in each.
If the following month TIP fell to −0.3%, 100% of the portfolio would go to BIL or IEF (whichever has more momentum) even if the S&P 500 kept rising.
What it adds over a static portfolio
The honest answer is in the numbers. With real ETFs since Sep 2008, HAA Balanced returns 9.7% a year with a maximum drawdown of -9.3%, against 8.5% and -26.8% for a 60/40 over its own period. The main advantage is the control of drawdowns. Full detail on the strategy sheet.
Limits
- It is paid for with turnover: trading every month costs commissions and, in a taxable account, taxes.
- With ETFs there are only about 18 years of history.
- The past success of the rules does not guarantee they will keep working.
- It is not a promise to beat the market every year, but a way of trimming drawdowns.
Frequently asked questions
Who created HAA?
Wouter Keller, author of other momentum strategies (such as VAA, DAA and BAA), and Jan Willem Keuning. They published the paper on SSRN in February 2023.
Is it better than buying an S&P 500 fund?
It depends on what you are looking for. An S&P 500 fund returns more in bull markets, but suffers drawdowns of more than 30-50%. HAA aims for much smaller drawdowns, at the cost of turnover and sometimes missing out on rises.
Can I apply it myself?
Yes: the rules are public. You need to calculate the momentum every month or check it here, and execute the trades with a broker.