01 Jun Learning From Mebane Faber's "Relative Strength Strategies for Investing"

The paper explores Relative Momentum strategy on Equities Sectors.

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.

The paper explores investing in sectors based on Relative Momentum. The paper explores various permutations, investing in the top 1, 2, 3, up to 9 sectors on equal weighted basis. Relative Momentum method works on all of the measurement periods from one month to twelve months, as well as a combination of the 1, 3, 6, 9, and 12 month time periods. As investing in Equities Sectors is inherently high risk with high max drawdowns, the resulting performance of a Relative Momentum strategy on Equities sectors also displays high max drawdowns.

To reduce the max drawdowns, the holdings can be moved entirely to 100% cash (T-Bills) when the S&P 500 is below its 10 month Simple Moving Average (SMA).

By adding the dynamic hedge, most portfolios preserve their returns but have the added benefit of reduced volatility and drawdowns.

Research Paper: Relative Strength Strategies for Investing

Authors: Mebane T. Faber

Company: Cambria Investment Management