Transcription

• Speaker #0

  Hello, welcome back to Papers with Backdesk podcast. Today, we're diving into another algo trading research paper. It's Gary Antonacci's Risk Premia Harvesting Through Dual Momentum. Ah,

• Speaker #1

  yes. Antonacci's Dual Momentum. This paper is a really interesting look at how you can actually combine two types of momentum. I think a lot of investors are familiar with at least one of these to get some pretty unique results. And we'll definitely unpack how it all works. You know, one of the things that really jumped out to me was how this approach is designed to work across a lot of different asset types. You know, stocks, bonds, REITs, commodity. It's not just about, you know, chasing the hottest stock or sector.

• Speaker #0

  Right. So not just putting all your eggs in one basket.

• Speaker #1

  Exactly.

• Speaker #0

  But before we go any further, can you give us like a quick recap of what these two types of momentum are?

• Speaker #1

  Sure. Of course. So. Most people, when they think about momentum, they're already familiar with what we call relative momentum. You know, you're comparing assets, you're seeing which is the strongest. You're kind of picking the winners in a group. But absolute momentum, that's a little different. It's more about how an asset is performing against like a fixed benchmark, right? It doesn't like treasury bills. And this is this is really key to Antonacci's whole approach.

• Speaker #0

  OK, so you're not just riding the wave. You're making sure the wave is actually moving. you know, up in the right direction.

• Speaker #1

  Yeah, that's a great way to put it. Yeah.

• Speaker #0

  Safety check.

• Speaker #1

  It's like a built-in risk management system. It's saying, hey, even if this asset is doing great compared to its peers, you know, if it's not beating, you know, just the safe bet of treasury bills, maybe we should hold back.

• Speaker #0

  I see. So it's not just about the returns. It's about managing the risk as well.

• Speaker #1

  Exactly. It's about both.

• Speaker #0

  Now, the paper gets into the specifics of, you know, how this dual momentum strategy actually gets put into practice. And it's surprisingly simple. It comes down to this really structured approach using something called modules.

• Speaker #1

  Right, right. Antinachi divides the investment universe into these modules, and each one is focused on different asset types and the kind of risks that come with those. Okay. So you might have a module, for example, for U.S. and international equities. You'll have one for high yield and credit bonds, maybe another one for REITs. And then, you know. Lastly, a module for gold and treasuries. Each of these acts as like its own little mini portfolio.

• Speaker #0

  So it's like a diversified portfolio of mini portfolios.

• Speaker #1

  That's a good way to think about it. Yeah.

• Speaker #0

  Interesting. Can you walk us through like how these modules actually work? So, you know, how do we choose what to actually buy within each one?

• Speaker #1

  Sure. It's a two stage selection process. And this happens every month when you rebalance the portfolio. The first stage is you look at relative momentum within the module. So let's say we're looking at the equity module. You would compare the performance of U.S. stocks, you know, something like SPY against international stocks, something like EF over the past 12 months. Whichever one has done better, that's the winner of the first stage.

• Speaker #0

  So classic relative momentum play there. Right. But that's only half the story. Right. Right. Then the absolute momentum hurdle kicks in.

• Speaker #1

  Exactly. Exactly. So you take that winner from the relative momentum comparison. Right. And you pit it against good old Treasury bills. Now, if your winner, let's say it was U.S. stocks, hasn't outperformed Treasury bills over those past 12 months, you actually don't buy them. Instead, you put that portion of your portfolio into Treasury bills. Essentially, you're saying, hey, even though U.S. stocks are beating international stocks, they're not beating the safest bet. So let's let's play it safe for now.

• Speaker #0

  So even if something looks good relative to its peers, it still has to pass this absolute momentum test. That's where the risk management really comes in, I guess.

• Speaker #1

  Exactly. That's what makes the system so interesting because it's combining that potential for high returns from relative momentum, but it's also this risk management element from the absolute momentum.

• Speaker #0

  Okay. I'm starting to see how this all fits together. Yeah. But the real question is, does it actually work? Right. Let's talk backtest results. What kind of returns are we looking at here?

• Speaker #1

  Yeah. Let's get into the numbers. So Antonagy backtested the strategy all the way back to 1974. And he ran it through 2017. So we're talking almost four decades of data. And the composite portfolio, so that's taking into account all the different modules, delivered an annualized return of 14.9 percent. And the Sharpe ratio was 1.07.

• Speaker #0

  14.9 percent. Yeah. That's a number that would make any investor sit up and take notice. But what really piqued my interest was that Sharpe ratio. 1.07 is exceptional, especially over that kind of time frame. That suggests a pretty smooth ride.

• Speaker #1

  It really does. It really does. And what's even more impressive is that the strategy wasn't just making money. It was doing it with less volatility than most of the individual assets within the portfolio.

• Speaker #0

  So it's not just about beating the market. It's about beating it with less risk.

• Speaker #1

  Exactly. Taking less risk to get there.

• Speaker #0

  But. Let's be honest. What everyone really wants to know is how does this thing handle the tough times? You know, those bear markets everyone dreads.

• Speaker #1

  Yeah. And that's where things get really interesting, because when you compare dual momentum to to kind of more traditional benchmarks, something like a 60 40 stock and bond portfolio, it consistently comes out on top, especially during those bear markets. OK. You know, table 13 in the paper actually breaks down the performance during some of the worst market crashes. And. But the results are pretty fascinating. So for example, during the crash of 2008, this strategy was only down 10%. A typical 60-40 portfolio lost over 20%.

• Speaker #0

  Wait, so it was actually down less than 11% during 2008? That's right. That's incredible. I think most investors would probably take that kind of performance in a heartbeat.

• Speaker #1

  Absolutely. Absolutely. And that's what really highlights the power of this approach, right? It's not just about riding those waves of momentum. It's about having a system in place to navigate. those inevitable storms.

• Speaker #0

  This is starting to sound almost too good to be true.

• Speaker #1

  Yeah.

• Speaker #0

  14.9% returns, sharp ratio over one, weathering market crashes like a champ. Right. Where's the catch?

• Speaker #1

  Well, there are some nuances that we need to explore, right? I mean, remember, this is a back test, and past performance, as we always say, isn't always indicative of future results. Right. And, you know, there are some practical considerations, like transaction costs and data availability, things like that. But before we get into all of that, I think it's worth diving a little deeper into the role of absolute momentum here. Yeah, you're right. It really seems to be like the secret sauce.

• Speaker #0

  Yeah. We've talked about how it acts as a risk management tool, but is it really that important? Can we get similar results with just relative momentum?

• Speaker #1

  That's a great question. And the answer is probably not. Table 14 in the paper actually provides a direct comparison of portfolios with and without the absolute. momentum component. And the difference is it's pretty striking. While both strategies do boost returns, it's the absolute momentum component that really drives down volatility and reduces those really gut-wrenching drawdowns.

• Speaker #0

  So it's like the absolute momentum is acting as this stabilizer, smoothing out the ride, preventing those massive losses that can take years to recover from.

• Speaker #1

  Exactly. Exactly. And there's another benefit of incorporating absolute momentum. It's a little less obvious, but it actually helps to lower the correlation between the different modules in the portfolio.

• Speaker #0

  Okay. Now, that sounds intriguing. We all know diversification is important. Right. But why would absolute momentum have this effect on correlation?

• Speaker #1

  Well, because by incorporating that absolute momentum filter, you're essentially ensuring that each module is only holding assets that are, you know, exhibiting strong upward trends. And that means that the modules are less likely... to all move in lockstep with each other because they're all responding to to slightly different market signals so it's like each module is playing its own tune following its own rhythm exactly which helps to dampen that overall volatility of the portfolio exactly exactly and and this brings us to i think one of the most fascinating aspects of antinachi's research it's it's not just about finding assets with momentum it's about building a portfolio where those assets are they're kind of moving in a beautifully uncorrelated dance right

• Speaker #0

  That's a great way to put it. So not only is absolute momentum helping to manage risk at the individual asset level, but it's also enhancing the diversification of the whole portfolio.

• Speaker #1

  Exactly. It's a really powerful combination.

• Speaker #0

  Powerful one-two punch.

• Speaker #1

  It is. And that's why this dual momentum strategy is so compelling, right? Because it addresses risk at multiple levels while still capturing that potential for high returns. But of course, the million dollar question is, can this be replicated in the real world?

• Speaker #0

  That's what I was just thinking. The backtest results are, they're impressive, but we need to think about those practical challenges of actually implementing them. Things like transaction costs and data availability, even maybe our own behavioral biases.

• Speaker #1

  Yeah, you're absolutely right. We need to dig into those practical considerations. And we also need to consider, you know, how the market has changed since Antonacci conducted his research. Are the same dynamics still at play today? So let's dive into that next.

• Speaker #0

  Yeah, it's a valid question, right? I mean, Antonacci's backtest. only goes up to 2011. And let's face it, the market landscape has shifted quite a bit since then. It has. It's been a wild ride, to say the least. You know, we've had a decade of rock bottom interest rates, quantitative easing, a global pandemic, and now we're dealing with inflation and geopolitical uncertainty. It makes you wonder if a strategy that worked so well back then can still, you know, cut it in this new environment.

• Speaker #1

  Yeah, exactly. I mean, past performance is never a guarantee of future results. That's the classic disclaimer we always hear. Right. But I think there's reason to be optimistic here because the core principles behind dual momentum are really rooted in these market inefficiencies. And they've been around for decades. These aren't just recent trends. They're kind of deeply ingrained in how markets behave.

• Speaker #0

  So you're saying the underlying forces that are kind of driving this strategy are still at play?

• Speaker #1

  I think so. I think so. Think about it this way, right? Momentum, trend following, it's basically a reflection of human psychology, right? How we react to information, how we get caught up in fear and greed. These patterns have been around as long as markets have existed.

• Speaker #0

  So as long as humans are still driving the market, there's a good chance these inefficiencies will stick around. And strategies like dual momentum can capitalize on them.

• Speaker #1

  Yeah, exactly.

• Speaker #0

  But what about the actual implementation? Have there been any major changes in the market that could... you know, throw a wrench in the works?

• Speaker #1

  You know, one thing that comes to mind is the rise of passive investing, index funds, ETFs. I mean, they've just exploded in popularity. And that's led some people to question whether active strategies like this one can still, you know, find an edge.

• Speaker #0

  Right. If everyone's just buying the index, how can you possibly outperform?

• Speaker #1

  Right. That's a fair point. But I think it's important to remember that. Passive investing doesn't magically erase market inefficiencies. Right. It just kind of changes the playing field a little bit.

• Speaker #0

  So passive investing might actually create new opportunities for a strategy like dual momentum.

• Speaker #1

  It's possible. Think about it, right? When you have these huge amounts of money flowing into index funds, it can push up the price of those underlying assets regardless of their fundamentals. And that creates these distortions, these mispricings that skilled active managers can potentially exploit.

• Speaker #0

  So instead of being a threat, passive investing could actually make dual momentum even more effective.

• Speaker #1

  It's something to think about. Yeah. Yeah. It's definitely something to consider.

• Speaker #0

  Okay. So we've talked about the changing market landscape and the impact of passive investing, but let's get back to those practical challenges you mentioned earlier. What are some of the real world hurdles that investors might face when they're actually trying to implement this strategy?

• Speaker #1

  Well, one challenge is just data availability. You know, Antonacci's research went all the way back to 1974. But finding reliable data for all of the assets in his portfolio over that long of a period can be tricky, especially for some of the more niche asset classes.

• Speaker #0

  Right. You might need to, like, dig deep or rely on third party data providers and things like that.

• Speaker #1

  Exactly. Exactly. Another challenge is transaction costs. Even though the strategy doesn't involve a ton of trading, you're still rebalancing monthly. And those fees can add up, especially if you're using ETFs with high expense ratios.

• Speaker #0

  So being cost conscious is essential here.

• Speaker #1

  Yeah, absolutely.

• Speaker #0

  Choosing the right ETFs can make a big difference in your overall returns.

• Speaker #1

  It can. It can. And then, of course, there's, you know, the elephant in the room, our own behavioral biases.

• Speaker #0

  You mean the temptation to panic and sell when the market dips or to chase, you know, hot stocks when everyone else is making money?

• Speaker #1

  Exactly. Exactly. Sticking to a systematic strategy like this can be can be tough when emotions are running high.

• Speaker #0

  Yeah. Discipline is is definitely key here. But how can investors develop that kind of discipline? Do you have any tips?

• Speaker #1

  Yeah, I think one tip is to to really zoom out and focus on the long term. Remember, this strategy isn't about, you know, getting rich quick. It's about generating consistent returns over time.

• Speaker #0

  So don't get caught up in the day to day noise. Just stay focused on the big picture.

• Speaker #1

  Exactly. Exactly. And another tip is to try to automate as much of the strategy as possible. That takes the human element and the potential for emotional decisions out of the equation.

• Speaker #0

  Set it and forget it, basically.

• Speaker #1

  Essentially, yeah. And if you're still feeling unsure, you know, don't be afraid to seek professional guidance. There are financial advisors who specialize in these types of strategies.

• Speaker #0

  So if you're not comfortable managing it yourself, you can always get help from an expert.

• Speaker #1

  Exactly. The point is there are solutions out there.

• Speaker #0

  So to sum up this part of the conversation, it seems like there are some real world challenges to implementing dual momentum, data, costs, our own psychology. But there are also ways to address those challenges.

• Speaker #1

  That's right. Yeah. And when you weigh those challenges against the potential benefits that we talked about earlier, you know, those high returns, low volatility, strong performance during market downturns, I think it's clear that this strategy is worth. serious consideration.

• Speaker #0

  I agree. It seems like Antonacci has really tapped into something special here, a really robust approach that combines the power of momentum with that built-in risk management system.

• Speaker #1

  Yeah. Yeah. I couldn't have said it better myself. But before we wrap up, I think it's important to kind of take a step back and consider the broader implications of this research.

• Speaker #0

  Okay. I'm intrigued. What do you have in mind?

• Speaker #1

  Well, this strategy really, really challenges some of the... the conventional wisdom about investing. It suggests that you don't need to be a, you know, Wall Street insider or have a Ph.D. in finance to succeed.

• Speaker #0

  That's a powerful message, especially in today's world, where so many people feel like the market is kind of rigged against them.

• Speaker #1

  Right. Exactly. Exactly. Antonacci's research shows that there are there are alternative approaches out there, strategies that are based on on sound principles. And that can be implemented by by anyone with with the discipline and the patience to to follow the rules.

• Speaker #0

  It's a reminder that the market isn't just a playground for the the wealthy elite. There are there are opportunities for everyone to to participate and potentially profit.

• Speaker #1

  Precisely. Precisely. And that brings us to another important point. Right. This. The strategy isn't about timing the market or picking the next hot stock. It's about following a systematic process, trusting the data, and letting the market do its work.

• Speaker #0

  So it's about taking the emotion out of investing and embracing a more data-driven approach.

• Speaker #1

  Exactly. And that's a message that I think resonates with a lot of people, especially those who've been burned by trying to outsmart the market or chase fads.

• Speaker #0

  It's about finding a system that works and sticking with it through thick and thin.

• Speaker #1

  Right. And I think that's one of the key takeaways from Antonacci's research, right? Simplicity, discipline, and a focus on risk management can go a long way in achieving your financial goals.

• Speaker #0

  Well said. Well said. But before we get too philosophical, let's bring this back down to earth. What are some concrete steps that our listeners can take if they're interested in learning more about dual momentum?

• Speaker #1

  Well, I'd recommend starting by reading Antonacci's paper. It's It's surprisingly accessible even if you're not a quant.

• Speaker #0

  Okay, so read the paper. Then what?

• Speaker #1

  Then I'd suggest, you know, exploring some of the resources that are available online. There are tons of articles, blog posts, even videos that delve into the nuances of dual momentum.

• Speaker #0

  So do your homework, dive deep, and really get a feel for how this strategy works.

• Speaker #1

  Exactly. And if you're ready to take the next step, you know, consider reaching out to a financial advisor who specializes in this type of approach.

• Speaker #0

  So get some expert guidance to make sure you're implementing this strategy correctly.

• Speaker #1

  Precisely. Precisely. The bottom line is, if you're intrigued by dual momentum, there are plenty of resources available to help you learn more and get started. Well,

• Speaker #0

  that's encouraging. It sounds like a lot to digest, but also incredibly exciting.

• Speaker #1

  It is. It is. This is a strategy that has the potential to change the way you think about investing.

• Speaker #0

  And that's a pretty powerful thing.

• Speaker #1

  It really is. It really is. But before we get too carried away, I think it's time for us to kind of wrap up this discussion and move on to the final section of our deep dive.

• Speaker #0

  OK, I'm ready. What's what's next on the agenda?

• Speaker #1

  Well, we've talked about the theory, the backtest results, the practical considerations, even the broader implications of dual momentum. But before we sign off, I want to leave our listeners with one one final thought provoking question.

• Speaker #0

  All right. Lay it on me.

• Speaker #1

  Given everything we've discussed today, you know, the impressive historical performance, the built-in risk management, the simplicity of the approach, could dual momentum be the key to unlocking consistent returns in today's, you know, complex and ever-changing market? Something to ponder as we move into our final thoughts.

• Speaker #0

  Yeah, that's a great question to leave our listeners with. Can dual momentum really be that key? I guess only time will tell.

• Speaker #1

  It really will. And that's... That's the beauty of investing, right? It's an ongoing journey of exploration and discovery.

• Speaker #0

  Well, folks, we've reached the end of our deep dive into Antonacci's dual momentum strategy. It's been a fascinating exploration, to say the least.

• Speaker #1

  We really have covered a lot of ground, you know, from the basic mechanics to those impressive backtest results, even some of the broader, you know, philosophical implications.

• Speaker #0

  We've also tackled those practical challenges and considered, you know, how this strategy might… might fare in today's ever-changing market environment.

• Speaker #1

  Yeah. But, you know, most importantly, I think we've highlighted the power of simple yet, you know, effective strategies. Strategies that focus on managing risk while still striving for those market-beating returns.

• Speaker #0

  Exactly. It's a reminder that you don't need to overcomplicate things to be successful in the market.

• Speaker #1

  Sometimes the most elegant solutions are the ones that are rooted in those.

• Speaker #0

  timeless principles like like momentum trend following diversification so as we wrap up this this episode we want to leave you with with a few key takeaways yeah absolutely first don't be afraid to to challenge the conventional wisdom explore explore different approaches and and find what what works best for you right you don't have to follow the crowd second always always keep risk management top of mind it's it's not just about chasing returns it's about protecting your your capital yeah preservation of capital is is key And finally, remember that investing is a marathon, not a sprint.

• Speaker #1

  It really is.

• Speaker #0

  Discipline and patience are your greatest allies. If you can. you know, embrace those principles and find a strategy that that aligns with your your goals and your risk tolerance, you'll be well on your way to to achieving, you know, financial success.

• Speaker #1

  And who knows, maybe maybe dual momentum will be the strategy that that helps you get there.

• Speaker #0

  Thank you for tuning in to Papers with Backtest podcast. We hope today's episode gave you useful insights. Join us next time as we break down more research. And for more papers and backtest, find us at https.paperswithbacktest.com. Happy trading.