01 Mar Learning From Gary Antonacci's "Risk Premia Harvesting Through Dual Momentum"

Both Absolute and Relative Momentum can enhance returns and Absolute Momentum reduces volatility and drawdown more. Combining Absolute and Relative Momentum gives the best risk-adjusted returns.

In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.

While Relative Momentum has been researched extensively in academia and remains a robust strategy, it is desirable to be long only when top performers are also in a price uptrend.

The author used a modular approach for portfolio diversification. The modules include Equity, Credit, Real Estate and Economic Stress. Within each module, the indices are subjected to relative strength ranking. The top performing index will be chosen. For example, Credit modules include High Yield and Credit Bonds. Economic Stress modules include Gold and Long-term Treasury. Subsequently the top performer will be compared to Treasury Bills to determine if excess returns are positive or negative. If excess returns are positive, we will invest in the chosen asset. If excess returns are negative, we will invest in Treasury Bills.

“Table 10” of the paper (reproduced below) shows the results of each module and an equally weighted composite of all four dual momentum modules. The composite shows the highest Sharpe Ratio and significantly reduced Maximum Drawdown.

Source: Gary Antonacci

Research Paper: Risk Premia Harvesting Through Dual Momentum

Author: Gary Antonacci

Company: Portfolio Management Consultants