Cycle Dynamics TheoryCycle 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.
http://www.bwater.com/Uploads/FileManager/research/All-Weather/All-Weather-Story.pdf 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.