Cliff Asness of AQR recently published a paper entitled “Value and Momentum Everywhere”
The main points for me were:
- Value and momentum are both broad and persistent anomalies.
- Value and momentum are reliably negatively correlated.
This second effect is rare across asset classes and may be very valuable for portfolio construction. I will be exploring this further.
A very simple implementation is to take the “small value” (SV) data series from the French data library and add a momentum rule:
Invest when the previous month’s return is positive, otherwise go to cash (3% annual interest).
The result is to increase annual returns by several percentage points, reduce time in market to 67% and increase Sharpe by 50% to 1.2.
Note: the best return of 19.3% CAGR is without using the recession model, only the rule above.
Plotting with the results from the previous post:
|COMP-IBH||Buy & hold||Sharpe|
Examining the equity curve shows that SV momo is very robust in recessions.
Plotting the SV return for the current month against the next month shows the degree of autocorrelation present (see upward sloping trendline):
If desired, SV momo could be combined with other asset classes (e.g. gold, bonds, REITs) into a Faber-type tactical allocation :
“Small value momo” returns very similar to the “top 3 of 13” asset strategy in that paper.
Another similar momentum switching strategy is COP which has the interesting property of real-time success in the last few years. Switching allows capital to move to the best performing asset classes without attempting prediction, in accordance with the literature.
Momentum may also be combined with trend-following: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2126478
These addendum items require some more study.