Gary Antonacci‘s forthcoming book Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk (New York: McGraw-Hill, 2014) is currently Amazon.com’s top-ranked book for “momentum investing”. Antonacci’s 2013 paper ‘Risk Premia Harvesting Through Dual Momentum’ (PDF) contains a preview – including a great opening discussion of why the momentum anomaly exists in the stockmarket and why behavioural finance factors are likely to be involved.
Antonacci distinguishes between two types of mometum strategies: (1) cross-sectional / relative momentum — used in long-short and index tracking strategies, and in the Relative Strength Indicator in ‘chartist’ technical analysis; and (2) absolute momentum – a time series phenomena where an asset’s prior price helps to determine its current price – used in trend-following.
Antonacci’s dual mometum framework combines both types of momentum to extract alpha from volatile asset classes. He uses a modular approach to portfolio construction. Treasury bills provide an initial hurdle rate for relative momentum, with a 12 month lookback period. Antonacci then uses absolute return increase the basis point return, whilst decreasing the portfolio’s volatility and maximum drawdown. He has tested the dual momentum strategy in fixed income, equity, and real estate REIT asset classes, and with other market factors such as credit risk and economic volatility.
The paper’s final paragraph summarises Antonacci’s dual momentum strategy:
The combination of relative and absolute momentum makes diversification more efficient by selectively utilizing assets only when both their relative and absolute momentum are positive, and these assets are more likely to appreciate. A dual momentum approach bears market risk when it makes the most sense, i.e., when there is positive absolute, as well as relative, momentum. Module-based dual momentum, serving as a strong alpha overlay, can help capture risk premia from volatile assets, while at the same time, defensively adapting to regime change. [emphasis added]
Dual momentum investing is thus an alpha extracting strategy that combines two different forms of momentum to diversify the portfolio, and to lower volatility. The two different forms of momentum identify a set of market assets that are highly probable to appreciate in value in the near-term, particularly in periods of economic volatility.
I suggest that momentum investors adapt to these market changes by possibly buying from distressed debt value investors near market lows that show signs of recent asset appreciation – and through identifying herding and overshoot conditions – selling to trend-following, news effect, and late-coming retail investors or mutual / pension fund managers. Thus, an understanding of game theoretic reasoning – as argued by the late trading psychologist Ari Kiev whilst at the hedge fund SAC – and population ecology models applied to market microstructure – might be helpful to momentum investors.