Momentum-Based Allocation

/Momentum-Based Allocation

Momentum-Based Allocation

By | 2017-08-18T17:00:11+00:00 April 8th, 2013|Uncategorized|1 Comment

Absolute Momentum: A Simple Rule-Based Strategy and Universal Trend-Following Overlay

  • Gary Antonacci
  • A version of the paper can be found here.
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Abstract:

There is a considerable body of research on relative strength price momentum but relatively little on absolute, time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter – the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60-40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy to implement, rule-based approach with many potential uses as both a stand- alone program and trend following overlay.

Data Sources:

Not disclosed; 1973-2012.

Alpha Highlight:
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Strategy Summary:

  1. Paper uses the following assets: MSCI US, MSCI EAFE, Barclays Capital Long U.S. Treasury, Intermediate U.S. Treasury, U.S. Credit, U.S. High Yield Corporate, U.S. Government & Credit, and U.S. Aggregate Bond indices, 90-day U.S. Treasury bills, FTSE NAREIT, S&P GSCI, and monthly gold returns
  2. Calculate the past 12-month momentum for each asset class using monthly excess returns, defined as the excess return above the Treasury Bill.
  3. If the asset momentum is positive, hold the asset for the next month.  If the momentum is negative, switch into the 90-day U.S. Treasury Bill.
  4. Paper shows that adding this momentum overlay to a 60/40 portfolio adds significant value by reducing drawdowns.
  5. Paper also show this adds value when applied to a 5 asset portfolio (called the parity portfolio in the paper).

Commentary:

  • Documents that adding a simple momentum overlay to each asset class adds significant value.
  • Overall, is a valuable tool for any asset class.
  • The strategy is highly related to the simple MA strategy.
    • Empiritrage has a detailed report highlighting the comparison between this strategy and the MA strategy

  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • Garrett

    The most remarkable thing about this paper for me is the performance charts starting on page 11. Using this strategy a trader would avoid the crash of 2008 in every asset besides commodities and the tech bubble crash. It wouldn’t help against an ’87-like event though.