Melding Momentum, Diversification and Absolute Return
April 23, 2012 - Momentum Investing, Strategic Allocation
What is the safest way to exploit asset price momentum? In his April 2012 paper entitled “Risk Premia Harvesting Through Momentum” (the National Association of Active Investment Managers’ 2012 Wagner Award winner with different title), Gary Antonacci investigates systematic capture of upside volatility at the asset class level via a momentum/diversification/absolute return strategy that:
- Exploits momentum via long positions in winners, based on 12-month lagged total returns with no skip month, re-evaluated monthly.
- Maintains diversification by:
- Using indexes rather than individual securities; and,
- Holds the equally weighted winners from each the following pairs of competing indexes: gold versus long-term Treasury bonds; U.S. equities versus foreign equities; high yield bonds versus intermediate credit bonds; and equity real estate investment trusts (REIT) versus mortgage REITs.
- Mitigates risk by substituting Treasury bills (T-bills) for each pairwise winner that has not outperformed T-bills during the 12-month ranking interval.
Using monthly total returns for indexes constructed from targeted classes of equities, bonds, REITs and spot gold, along with contemporaneous 90-day Treasury bill yields, during January 1974 (or the earliest available) through December 2011, he finds that: Keep Reading