What is Hybrid Asset Allocation (HAA)?
Hybrid Asset Allocation (HAA) is a tactical asset allocation strategy that uses momentum signals to rotate between offensive assets and defensive Treasuries.
HAA was introduced by Wouter Keller and Jan Willem Keuning in a 2023 paper as a simpler successor to their Bold Asset Allocation (BAA). Its appeal is the combination of an aggressive, mostly-invested portfolio with systematic crash protection driven by a single canary asset.
How the HAA Strategy Works
HAA generates monthly allocation signals by calculating 13612U momentum scores, ranking assets, and adjusting exposure between offensive and defensive positions. The strategy combines relative momentum, absolute momentum, and a TIP canary signal to control portfolio risk.
1. The 13612U Momentum Formula
HAA uses the 13612U momentum model to rank assets by total return momentum.
The momentum formula: (1-month return + 3-month return + 6-month return + 12-month return) / 4
The 13612U model gives equal weight of 25% to all four periods, unlike the 13612W. Signals are calculated using monthly closing prices and total return data.
2. The TIP Canary Signal
HAA uses the iShares TIPS Bond ETF (TIP) as its canary asset to detect rising yields and inflation pressure.
When TIP has negative momentum, it signals a risk-off environment and moves the portfolio into defensive assets.
When TIP momentum remains positive, HAA continues selecting assets from its offensive universe.
3. The HAA Asset Universe
HAA uses three asset groups:
- Offensive universe: SPY, IWM, VEA, VWO, VNQ, DBC, IEF, TLT
- Defensive universe: BIL and IEF
- Canary asset: TIP
The offensive universe is used to select assets with the strongest momentum, while the defensive universe provides lower-risk allocations during weak market conditions.
IEF (7–10 year US Treasury bonds) appears in both the offensive and defensive universes. In the offensive universe, it competes with other assets based on momentum. In the defensive universe, it serves as a lower-risk allocation when the strategy reduces exposure.
Note: Later community backtests have also explored adding QQQ to the offensive universe, showing approximately 1% higher CAGR with around 3% higher maximum drawdown.
4. How HAA Selects Positions
At the end of each month, HAA ranks the offensive universe using 13612U momentum and selects the top four assets by highest momentum.
Each selected asset receives an equal allocation. Assets with non-positive momentum are replaced by the best defensive asset. If the TIP canary signal turns negative, HAA moves 100% into defensive positions.
5. Monthly Rebalancing Rules
HAA rebalances on the close of the last trading day of each month.
- Momentum: For every asset, compute the unweighted average of 1, 3, 6, and 12-month total returns.
- Canary check: If TIP momentum is zero or negative (risk off), put 100% into the better of BIL or IEF, whichever has higher momentum.
- Selection: If TIP momentum is positive (risk on), hold the top 4 of the 8 offensive assets, 25% each.
- Absolute momentum filter: Any selected asset with zero or negative momentum has its 25% replaced by the better of BIL or IEF (one bad asset → 75/25, all four bad → 100% defensive).
- Rebalance fully every month, even if the same assets are selected: intra-month drift means positions rarely sit at exactly 25% — sell overweight, buy underweight, back to equal weights. Hold untouched until next month-end.
HAA Performance and Backtest
The original HAA-Balanced backtest (1971–2022) returned a 15.9% CAGR, 1.21 Sharpe ratio, and 9.7% maximum drawdown, versus roughly 10.5% CAGR and a ~50% maximum drawdown for the S&P 500. The strategy was tested using monthly total return data with dividends reinvested and end-of-month rebalancing.
HAA has not beaten the S&P 500 in every period. Between 2012 and 2022, it returned 8.5% per year, compared with roughly 13% for the S&P 500, as strong equity markets reduced the benefit of its defensive allocation.
Since the paper was published, investors have created several HAA variants, including QQQ-based and leveraged versions. These are not part of the original strategy, but many community backtests have shown higher returns than SPY over their respective test periods.
HAA Variants
Hybrid Asset Allocation has evolved beyond the original paper. While HAA-Balanced is the version introduced by Keller & Keuning, investors have since developed several variations that modify the asset universe or use leverage to pursue higher returns.
HAA-Balanced
The original strategy from the paper. It combines offensive, defensive, and canary assets to participate in rising markets while reducing exposure during periods of elevated risk.
HAA-Balanced with QQQ
A popular community variant that replaces part of the U.S. equity allocation with QQQ. The higher Nasdaq-100 exposure has historically increased returns during technology-led bull markets while keeping the same monthly HAA framework.
HAA-Simple
A streamlined version that uses fewer ETFs while keeping the same momentum and crash-protection concepts. It is easier to manage and requires fewer trades than HAA-Balanced.
HAA Leveraged
HAA can also be implemented with 2× or 3× leveraged ETFs. Some versions leverage the entire portfolio, while others apply leverage only to the offensive assets and keep defensive positions unleveraged. These approaches can substantially increase both returns and drawdowns and are community-created adaptations rather than part of the original paper.