Cycle Dynamics

Cycle Dynamics Theory

Cycle Dynamics combines two of the most powerful and successful investment insights of recent decades. Then it aligns with further refinements through other complementary models. The first model at the foundation of Cycle Dynamics is the All-Weather (AW) portfolio approach developed by Bridgewater, currently the world’s largest hedge fund. This approach is a relatively static allocation model. However, it is derived by introducing cycle thinking to static portfolio allocation. The results are remarkably impressive, as over most long term time horizons this model has generated consistent out-performance relative to risk (alpha) compared to other static allocation models, but with much lower risk (beta). At its simplest it prepares for each part of the economic cycle, and then stays with the overall allocation throughout the cycle. In this way the portfolio achieves the long term return from every asset class, but achieves this with dramatically lower volatility, than other allocations. The chart below gives an idea of how a portfolio is constructed to balance each of the 4 possible combinations of the direction of growth and inflation. Cycle Dynamics starts by taking the AW concept but shifting it into a dynamic allocation strategy by using selective adaptive allocation models. This actively shifts the allocation through the economic cycle to the sectors that benefit the most from real time economic conditions, while avoiding the worst sectors. In this way, significant further long term out-performance can be made relative to the more static AW approach, and the returns are shown to be much more consistent.

Cycle Dynamics Execution

Cycle Dynamics systems dynamically adjust portfolio allocation in sequence with the rhythm of the whole economic cycle. By managing risk and adapting to new trends in real time, back tested data demonstrate that exceptionally good results can be achieved relative to widely used benchmarks.  The Cycle Dynamic models provide 4 systems that can be traded in any combination, weighting, or sequence. In each case, when the models are combined they lead to further improvements in return for risk results. The 4 systems can be regarded as providing a complementary and comprehensive framework for the active management component of an investment plan.  A module approach enables portfolios to be designed to meet each client’s investment goals. Cycle Dynamics models provides multiple benefits to investors: 1. Risk management is automatic and ensures that persistent downtrends are avoided, and allocation is constantly directed to long term uptrends for as long as they last. 2. Cycle Dynamics adapts automatically to changing economic and policy environments, therefore constant revisions to an investment plan are no longer necessary. 3. The Cycle Dynamic modules demonstrate very robust and favorable returns relative to risk, compared to standard benchmarks, over multi-year periods as shown in the model results below.

Further significant analysis are shown below in the models which demonstrate significant return-for-risk improvements relative to widely used benchmarks. Beyond this, yet further benefits can be achieved by using other complementary models. Much greater detail is provided through the links below.

The Four Cycle Dynamics Models

Asset Selector (click to expand)
Bond Selector (click to expand)
Equity Selector (click to expand)
Commodity Selector (click to expand)

The Cycle Dynamics Portfolio

The Cycle Dynamics portfolio bridges a gap in investment management between the All Weather approach and trend following systems.  A quick review of the All Weather and trend following methodologies reveals the distinctions.  It also shows how these systems can be integrated into a self-adjusting portfolio strategy with higher return-to-risk characteristics than many conventional approaches.   Read More  

Investment Management Clarity and Transparency

Investors constantly face a bewildering cloud of investment advice. How does anyone filter through it all to find out what really makes sense or at least resonates with their own thinking?  There is not a simple answer because, as Howard Marks says, “it’s not supposed to be easy.”   Investing involves assessing a multi-factor dynamic process. It also involves the unknowable future and how to prepare and react. The only way I know how to shed some light on my own approach is to provide as much clarity and transparency as possible in describing my own process, at least at the macro level. Read More