Comparative analysis of active and passive management strategies in multi-asset class portfolios

Portfolio management can be categorized into two distinct approaches: active and passive management. This thesis compares the performance of an actively traded automated strategy and a passively managed strategy across commodity futures products and large-cap equities. The comparison of each strategy’s performance metrics aims to better understand the effectiveness of each strategy in generating risk-adjusted returns relative to each other and to the market benchmark. This thesis also evaluates varying aspects of the actively traded automated strategy, including the parameters and normalization techniques associated with its trend-signal and position generation process. The strategy is based on the concept of trend-following and builds on basic trading frameworks by utilizing parameters and normalization techniques that optimize performance and add robustness. These parameters and techniques include a novel volume-weighted average price-based factor used as a proxy for volume-weighted momentum and a novel trend signal normalization technique using the Euclidean norm. This strategy also uses an aggregate of short-, medium-, and long-term trend signals to provide a more robust approach to capturing momentum. Moreover, the passive strategy also builds on traditional passive management approaches by adding commodity futures products and monthly rebalancing adjustments to the portfolio. The findings of this paper show that the active strategy outperforms the passive strategy and the market benchmark in absolute risk-adjusted returns. Moreover, the active strategy had significantly more stable rolling returns and reduced volatility in periods of market turmoil than the passive strategy and the benchmark. Furthermore, the utilization of commodities futures products and rebalancing adjustments in the passive strategy resulted in improved absolute risk-adjusted return metrics and outperformance over the benchmark, with added robustness during bullish and ranging market periods. The passive strategy also had the highest annual return, CAGR, and cumulative returns in comparison to the active strategy and the benchmark.