Cycle Dynamics. Low Risk, High Alpha Timeless Investment Strategies. Hidden In Plain Sight.

September 20, 2016

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The biggest natural investment advantage you are likely to find

Sometimes the most profound phenomena are simply hidden in plain sight. They have been there forever but almost no one sees it.

In the investing world, I believe that perhaps the biggest natural advantage investors can have is to understand how cycles impact their investments.

A few of the biggest and most successful investment managers and advisors use it as the core to their approach, yet this concept still remains widely misunderstood and underutilized.

Both the world’s biggest hedge fund, Bridgewater, and the fastest growing major independent investment research provider, Hedgeye, use this breakthrough transformation with outstanding results. So proof of concept is already established, and over multi decade periods of time.

How powerful is this concept? The header chart shows the simplest example, tested by Ned Davis research over a 40 year period. Using a childishly simple methodology, the “Trend System” shown in the header chart above beats all combinations of static allocation strategy by a significant margin, AND does so with dramatically lower volatility!

Our low risk Passive Cycle Dynamics portfolio shows similar characteristics

Early in 2016 the low risk passive CD portfolio (A) outperforms the S&P 500 (B) with far lower volatility. The volatility of A is just 25% of the S&P 500, and the drawdown is less than 10%. Yet the baseline portfolio still outperforms by over 2%.

PassiveCDbaselineVsSPY 042816

Passive Cycle Dynamics. 2 Simple Investment Transformations.

Introduction to two simple steps

As with any investment strategy or insight a very simple version is readily available, and most investors could simply use this to transform their risk and alpha (return to risk ratio), so much for the better, even with a single click. However, there are many levels to this way of thinking, and any number of refinements and improvements that can be introduced.

Step 1 – Breakthrough in static allocation models

Ray Dalio pioneered this approach in the 1970s, and today he runs the world’s biggest hedge fund – Bridgewater. For over 40 years Bridgewater’s “All Weather” fund (AW) shows that risk is dramatically lowered, and the alpha is multiples higher than competing models.

At its simplest AW prepares a partial allocation for each part of the economic cycle, and then stays with the overall allocation throughout the whole 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.

For example the chart below shows the wild gyrations of the S&P500 through the 2000 and 2008 bubbles.  Two different versions of the Dalio approach show much lower volatility and much higher returns through this whole period.


This methodology has been tested over the longest periods possible.

Here is 40 years of deep data to demonstrate the great benefit of taking this approach tested over the very long term. Furthermore, a few simple modifications further improve the approach.

The research above shows that some simple modifications can be made through allocation and rebalancing methodologies, this approach can also be taken fully into active asset management.

Step 2 – Breakthrough to actively managed cycle investing

The next leap in cycle investing involves examining the evolution of the economic cycles and focusing the actively managed allocation solely to the current sweet spot of the economic cycle.

Done well this takes cycle investing to a whole new level with another significant improvement in long term performance.

In the diagram below you can see Hedgeye describing how it measures and then positions as the cycle evolves. The four quadrants shown in the chart depict how they see the  evolution of two key macroeconomic factors, growth and inflation.




Here is a deeper dive into this investment approach with some more highly developed models:

Here is an example of how well some of these models can work. Massive outperformance of the S & P 500 with far lower volatility.


The results deliver the expected higher returns with lower volatility.





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Investing like the best can lower your stress and risk levels while bringing you higher, long-term returns. It can provide a stable platform for planning and give you more financial security now and for the rest of your life. Let’s get started.