This post looks at Factor* Dual Momentum with 3 factors: Value, Momentum and Low Volatility (or Betting against Beta). Previous posts covered 2 factors only.

* long portfolios from the factors, rather than the long minus short factors themselves.

Low Volatility data was kindly supplied by reader Paolo but only goes back to 1998, rather than 1950 as the previous tests.

The strategy holds the highest ranked portfolio by 12 month return, if return is greater than zero. Results are shown for the 2 and 3 factor strategies and the underlying portfolios.

The 3 factor position is shown in the bottom trace as 4 levels:

0 = Cash, 1 = Value, 2 = Momentum, 3 = Low Volatility

Low Volatility is clearly mainly held in 2001 and 2012.

Sharpe Ratio and Annual Return are summarized above.

The strategies return similar results except for a period in 2012 when access to Low Volatility allows 3 factor to outperform.

The Value portfolio has the highest returns in some periods (and overall) but a low Sharpe Ratio.

Low Volatility has the highest Sharpe Ratio due to the smooth equity curve and smaller drawdown in 2008.

Value and the 3 factor strategy have the highest returns over the test period.

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Please could I ask you where you found the data for the backtest ? I would like to try it out myself.

Most tests on this blog use Fama-French data: mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Low vol. data is from Quandl.

I am not clear how you structured the “Dual 2f” and “Dual 3f” portfolios in your backtest. Is the Dual 2F simply long the two highest ranked factors each month? (thus, the Dual 3f would be long all three factors *only* so long as the TTM returns were positive – or above some minimum return hurdle)?

thank you

2f is #1 of Value / Momentum (if TTM>0)

3f is #1 of Value / Momentum / BAB (if TTM>0)

The number is the number of factors in the test universe.

Look back a few posts to see more on 2f, tested to 1950.