Style Rotation Strategies

Abstract

Effective implementation of market-timing and style rotation strategies is challenging for an active fund manager. Problem #1 is devising a truly viable forecasting model. Problem #2 is that style rotation has direct implications for portfolio risk constraints and transaction costs; implementation depends moreover on institutional constraints and in-house investment philosophy. Applied using a variety of implementation rules that explicitly control for risk, style rotation strategies can be profitable for investors with different benchmarks and various risk constraints. More specifically, style rotation is as feasible for hedge fund managers who target absolute returns as it is for traditional fund managers who face tight risk constraints. The break-even transaction costs before style rotation strategies become unprofitable are reasonable, especially for fund managers who invest in medium-sized companies.