This strategy trades four modules (equities, credit, real estate, stress) and uses Dual Momentum for each module to select either one of two related assets or cash.
Gary Antonacci is the father of the Dual Momentum model. His unique approach is to combine absolute (time-series) momentum and relative (cross-sectional) momentum to his unique Dual Momentum model.
Our Composite Dual Momentum strategy is based on his paper Risk Premia Harvesting Through Dual Momentum. The strategy divides the portfolio in four “modules”, each targeted to a different component of the financial market; equities, credit, real estate and stress.
The four modules and their associated assets are as follows:
Courtesy of our in-house analysis, there are subtle differences in the assets we have chosen to represent each asset class versus those in Antonacci’s original strategy. Also, our momentum score uses shorter look-back period than the 12 months stipulated by the original strategy. This leads to earlier signals with a higher trading frequency, slightly better returns with a still similar volatility.
At the close on the last trading day of the month, calculate the momentum score for each of the eight asset classes.
Allocate 25% of the portfolio to each module. For each module, choose the asset with the highest momentum score (relative or cross-sectional momentum). If that asset’s momentum score exceeds the US Federal Funds Rate (absolute momentum), go long that asset at the close; otherwise move to cash.
The real advantage with this strategy is the combination of diversification through a broad basket of asset classes and the “Dual Momentum” approach by only being exposed to an asset class when its momentum is higher than the return for “cash”.
Every module maintains its size, even when that module is in cash. This avoids a concentration of assets with a higher risk premium like equities and real estate. While this is a drag on performance, it keeps volatility low and a lid on drawdowns in adverse conditions.
Gary Antonacci recommends his traditional Dual Momenum strategy GEM which is identical to the equity module above. His reasoning is that equities offer the highest risk premium, so investors should seek to invest as much as possible in stocks.
We think that his line of thought is correct. Having said that, we are of the view that the function of diversification is the main advantage of the Composite Dual Momentum. Firstly, equities can go through a long drought where they don’t enjoy the highest risk premium at all. Also, holding a large portion of the portfolio in only one asset can cause unnecessarily and unwanted sentiments. We see value in having access to a larger universe of asset classes because of its diversification. The performance of the Composite Dual Momentum strategy is the result of the combined momentum strategy for all four modules that plays so well together.
The Composite Dual Momentum strategy’s long-term return is superior to our benchmark while its defensive mechanisms helps to keep volatility and drawdowns low. We use the Dual Momentum strategy in our Defensive Model Portfolios.
More Resistant To Market Stress
Balanced for Risks and Opportunities
Exposure To Market Opportunities
fundalytix is not a trading platform or robo-advisor. fundalytix is somewhere in the middle in the best way possible. fundalytix is a small investment boutique with automated investing with a high level of customisation for its clients. Once we build your portfolio, our platform does the rest. This approach keeps cost down which results in higher growth and net returns.
