A mechanism is provided for dynamic cache allocation using a cache hit rate. A first cache hit rate is monitored in a first subset utilizing a first allocation policy of N sets of a lower level cache. A second cache hit rate is also monitored in a second subset utilizing a second allocation policy different from the first allocation policy of the N sets of the lower level cache. A periodic comparison of the first cache hit rate to the second cache hit rate is made to identify a third allocation policy for a third subset of the N-sets of the lower level cache. The third allocation policy for the third subset is then periodically adjusted to at least one of the first allocation policy or the second allocation policy based on the comparison of the first cache hit rate to the second cache hit rate.