Dual Momentum Investing
Absolute momentum as a systematic substitute for judgement.
Summary
Antonacci set out a systematic investment method combining two forms of momentum, supported by his own research and by the academic literature.
The two components are distinct. Relative momentum means selecting the asset that has outperformed among a set of alternatives, which is the standard cross-sectional momentum documented extensively in academic research since Jegadeesh and Titman. Absolute momentum, which Antonacci also calls time series momentum, means comparing an asset's own return over a lookback period against a risk-free rate or against zero, and holding it only if the comparison is favourable. Relative momentum selects what to own; absolute momentum decides whether to own anything at all.
His argument is that combining them addresses the weakness in each. Relative momentum alone still holds the best of a falling set during a bear market. Absolute momentum alone captures the exit but not the selection. Together they select the stronger asset while exiting to cash or bonds when neither is performing.
His implementation, which he calls global equities momentum, compares American equities against non-American developed equities using twelve-month returns, holds whichever is stronger, and holds aggregate bonds instead if the stronger of the two has underperformed Treasury bills. It is evaluated monthly.
He presents long backtests showing higher returns and substantially smaller drawdowns than buy and hold.
The underlying momentum effects are among the best documented anomalies in finance, appearing across asset classes, countries and centuries. The specific implementation is a small number of decisions with parameters selected after examining the data, which is the standard overfitting concern, and its out-of-sample record since publication has been weaker than the backtest. Momentum strategies also suffer occasional severe crashes at market reversals, which Antonacci addresses less than the risk warrants.
Key takeaways 7
- Relative momentum selects which asset to hold while absolute momentum decides whether to hold anything at all.
- Relative momentum alone still holds the best of a falling set during a bear market, which is what absolute momentum corrects.
- Comparing an asset's own trailing return against the risk-free rate is a simpler exit rule than a moving average and behaves comparably.
- Momentum effects are documented across asset classes, countries and long historical periods, which distinguishes them from most anomalies.
- A monthly evaluation frequency captures most of the available effect while limiting turnover and transaction cost.
- Momentum strategies suffer severe crashes at sharp market reversals, when the previously weak assets rebound fastest.
- A specific implementation with parameters selected after examining the data will perform worse out of sample than in the backtest.
Who should read it
Investors considering a systematic momentum allocation who want the method stated explicitly, weighed against its out-of-sample record and crash risk.
Where it sits in the reference 2
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