Kipnis Defensive Adaptive Asset Allocation

Details

The Kipnis Defensive Adaptive Asset Allocation strategy was developed by Ilya Kipnis and detailed on his website QuantStrat TradeR.

It’s a strategy that takes parts from different tactical asset allocation strategies and blends them together.

This one in particular uses aspects of:

Dual Momentum – to compare momentum across asset classes
Adaptive Asset Allocation – applies a min variance optimization to determine asset weighting
Vigilant Asset Allocation – measures momentum across multiple timeframes with different weighting applied to each
Defensive Asset Allocation – has a “canary universe” to determine when to move to defensive assets

On average, the portfolio holds 29% in equities, 35% in bonds, and 36% in cash, real estate, commodities, and gold.

Average Asset Allocation & Recommended ETFs

Weight	Ticker	ETF Name	Sector
29%	IEF	iShares 7-10 Year Treasury Bond ETF	Bond, U.S., Intermediate-Term
14%	SPY	SPDR S&P 500 ETF	Equity, U.S., Large Cap
11%	BIL	SPDR Blmbg Barclays 1-3 Month T-Bill ETF	Bond, U.S., Ultra Short-Term
9%	VNQ	Vanguard Real Estate Index Fund ETF	Real Estate, U.S.
6%	TLT	iShares 20+ Year Treasury Bond ETF	Bond, U.S., Long-Term
6%	RWO	SPDR DJ Wilshire Global Real Estate ETF	Real Estate, Global
6%	EEM	iShares MSCI Emerging Markets ETF	Equity, Emerging Markets, Large Cap
6%	VGK	Vanguard FTSE Europe ETF	Equity, Europe, Large Cap
5%	DBC	Invesco DB Commodity Index Tracking Fund	Commodity, Diversified
5%	GLD	SPDR Gold Trust	Commodity, Gold
3%	EWJ	iShares MSCI Japan ETF	Equity, Japan, Large Cap

Performance Metrics

All Data

10 Years

Annual Return

11.0%

Sharpe Ratio

0.97

10 Year Annual Return

4.0%

Volatility (annualized)

8.4%

Max Drawdown

-9.6%

Positive Periods

70.6%

Dot Com Annual Return

11.4%

Great Financial Crisis Return

12.4%

Trade Frequency

Monthly

Ulcer Performance Index

3.0

Annual Return

4.0%

Sharpe Ratio

0.50

Trade Frequency

Monthly

Volatility (annualized)

6.5%

Max Drawdown

-9.6%

Positive Periods

57.9%

Dot Com Annual Return

11.4%

Great Financial Crisis Return

12.4%

Ulcer Performance Index

0.9

Strategy Rules

This strategy trades once per month.

There are three asset groups used in this strategy:

Investment Universe: SPY, VGK, EWJ, EEM, VNQ, RWX, IEF, TLT, DBC, and GLD
Crash Protection: IEF and Cash
Canary: EEM and AGG

On the last trading day of the month, calculate the momentum score for each asset listed above
- Momentum Score = (12*(p0/p1)) + (4*(p0/p3)) + (2*(p0/p6)) + (p0/p12) – 19
- p0 = today’s price, p1 = price at close of last month, etc…
Select the top 5 (or less) assets from the Investment Universe that have a positive momentum score.
Find the asset weighting with a covariance matrix using 1-month volatility estimates and weighted as follows:
- [(12 * 1-month correlation) + (4 * 3-month correlation) + (2 * 6-month correlation) + (12-month correlation)] / 19
Find the percentage invested in the Investment Universe using the Canary assets
- If both Canary assets have a positive momentum score, invest 100% in the top 5 (or less) Investment Universe assets.
- If one Canary asset has a positive momentum score, invest 50% in Crash Protection and 50% in the Investment Universe
- If neither of the Canary assets have a positive momentum score, invest 100% of the portfolio in Crash Protection.
If Crash Protection is being used, invest in IEF if it has a positive momentum score. Invest in Cash if it does not.

How to Invest in the Defensive Adaptive Asset Allocation Portfolio

M1 Finance is the recommended platform to invest in this portfolio. Find out why.

Defensive Adaptive Asset Allocation Rolling Returns

	Low	Average	High
1-Year	-8.8%	11.3%	42.2%
3-Year	0.8%	11.4%	20.8%
5-Year	2.1%	11.5%	19.7%
10-Year	3.7%	12.0%	16.6%

Charts

Portfolio vs. 60/40 vs. S&P 500

All Data

10 Years

	Portfolio	60/40	S&P 500
Annual Return	11.0%	9.3%	10.3%
10Y Annual Return	4.0%	7.9%	12.2%
Sharpe Ratio	0.97	0.51	0.43
Max Drawdown	-9.6%	-29.7%	-50.97%
Volatility (annualized)	8.4%	9.9%	15.4%
Dot Com Annual Return	11.4%	-4.2%	-14.60%
Great Financial Crisis Annual Return	12.4%	-0.3%	-5.66%
Positive Periods	70.6%	65.8%	63.3%

**S&P 500 backtest to 1972 and 60/40 backtest to 1970

	Portfolio	60/40	S&P 500
Annual Return	4.0%	7.9%	12.2%
Sharpe Ratio	0.50	0.77	0.79
Max Drawdown	-9.6%	-20.5%	-24.0%
Volatility (annualized)	6.5%	9.3%	14.8%
Dot Com Annual Return	11.4%	-4.2%	-14.60%
Great Financial Crisis Annual Return	12.4%	-0.3%	-5.66%
Positive Periods	57.9%	68.6%	69.4%