Explain the role of temporary deviations from the strategic asset allocation
The idea
Tactical asset allocation makes deliberate short-term departures from policy weights to exploit expected short-term differences in returns. Discretionary approaches rely on judgement about valuations, the business cycle and sentiment; systematic approaches use rules such as valuation, momentum or carry signals. Deviations are usually confined to ranges set in the investment policy statement and often implemented with futures or swaps to avoid disrupting underlying managers. Success is judged by whether the tactical overlay improved return per unit of risk, for example through a higher Sharpe or information ratio relative to the strategic allocation, net of costs. Tactical positions add tracking risk and trading cost. The trap is confusing tactical calls with a revised strategic view, or letting them persist indefinitely.
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