What Is Dynamic Asset Allocation?

Dynamic asset allocation is a type of investment strategy that is commonly used by investment professionals. This strategy is frequently utilized by hedge funds and mutual funds in order to amplify returns. The main objective of dynamic asset allocation is to increase asset allocation in securities that are performing well while decreasing the amount of money allocated to poorly performing securities.

With this strategy, fund managers typically try to increase returns while offering 100 percent protection for the principal of the investment at the same time. 

One common example of this type of investment utilizes a zero coupon bond. For example, an individual will invest $10,000 into a fund that utilizes this strategy. The fund then purchases a zero coupon bond that will eventually be worth $10,000. The fund purchases this for a discount and then uses the money that is left over to invest in some type of equity. If the equity performs well, the investor will potentially be able to receive much more than $10,000 at the end of the term. If the equity performs poorly, the investor will still be able to get its initial principal back because the zero coupon bond is maturing at a value of $10,000.