Risk Asset Allocation Based On Momentum Relative To T-Bills

The most useful evaluation period we found for the best 2 of 5 model was 12 months. It produced a 9.56% return versus 7.49% for the equal weighted benchmark, but experienced a 16.69% maximum drawdown versus 15.50% for the benchmark.

The following charts show the results for evaluation periods of 1, 11 and 12 months.

1 Month Evaluation Period (2010 –Aug. 2018)

11 Months Evaluation Period (2010 – Aug. 2018)

12 Months Evaluation Period (2010 – Aug 2018)

Because we consider maximum drawdown protection key to the utility of relative momentum versus T-Bills, our conclusion is that the method needs a Bear market to be attractive.

Relative momentum allocation between a risk asset and T-Bills can produce meaningfully higher return and substantially less severe maximum drawdowns, but the fact is that the avoidance of large drawdowns (Bear markets) is the most important contributor to the potential of the method to outperform.

If there is no Bear market during the time the method is used, the potential for outperformance is limited.

Tax costs are a problem in taxable accounts (more when selecting among multiple risk assets, because position holding time is shorter with more ordinary income tax cost).

No universal evaluation period is effective for all risk assets, and the evaluation periods that work best drift over time, making continuous curve fitting part of the challenge and work load.

Not all assets have good potential with the method (basically only those that have occasional major drawdowns appear to work well).

Because of the role of Bear markets in creating advantage for the method, it is important when reviewing reports about the method to distinguish between long-term studies incorporating one or more Bears, and short-term studies of Bull markets.

Winning by not losing is the most important benefit of the method. The benefit derived is greatest when the loss experienced by buy-and-hold is greatest.

As must always be said, past performance is no guarantee of future performance.

I hope that for those of you who have been asking about the popular idea of risk reduction with relative momentum versus T-Bills, that this is helpful.

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Disclaimer: "QVM Invest”, “QVM Research” are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

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Harry Goldstein 2 years ago Member's comment

Good read, than you.