Introduction
Momentum investing has gained traction for its straightforward, data-driven approach to maximizing returns and managing risk. Among its prominent methods, dual momentum—popularized by Gary Antonacci—has stood out for its unique combination of relative and absolute momentum. While dual momentum often captures headlines, another closely related strategy, time series investing, shares many of its principles. In this article, we explore the commonalities between these two approaches and how understanding their synergies can offer a more comprehensive framework for trend-based investing.
What is Dual Momentum?
Dual momentum combines relative momentum and absolute momentum:
- Relative Momentum: Assets are compared to each other, with investments favoring those that outperform their peers.
- Absolute Momentum: An asset’s own historical performance is assessed, with investments favored only if they show positive momentum.
Together, these two forms of momentum make dual momentum a versatile, robust method for capturing gains while aiming to reduce downside risk by shifting to safer assets (like bonds or cash) during downturns.
What is Time Series Investing?
Time series investing, often associated with absolute momentum strategies, focuses solely on an asset’s historical performance to generate buy or sell signals. Using metrics like moving averages or other trend indicators, time series investors make decisions based on whether an asset is performing above or below its historical benchmarks. If an asset is trending positively, it is held; if it trends negatively, it may be sold or switched to a safer asset class.
Commonalities Between Dual Momentum and Time Series Investing
1. A Focus on Absolute Momentum for Risk Mitigation
Both dual momentum and time series investing rely on absolute momentum as a foundational principle for managing risk. In each approach, assets are only held if they meet a positive performance threshold over a defined period. When an asset shows negative absolute momentum (such as performing below a long-term moving average), both strategies shift away from that asset to protect against potential downturns.
2. Data-Driven, Rule-Based Approach
Both strategies emphasize systematic, rule-based decision-making. By setting strict performance benchmarks, they reduce emotional biases in investing, making them ideal for quant investors and those seeking consistency in execution. Rather than relying on subjective analysis or predictions, each approach uses historical price data to dictate whether to hold, sell, or rotate assets.
3. Downside Protection via Trend Following
A key benefit of both dual momentum and time series investing is their use of trend-following principles to avoid bear markets. By waiting for clear upward trends to invest, and stepping away when these trends reverse, both strategies offer a built-in safeguard against significant losses. For dual momentum, this trend-following approach is applied through absolute momentum filters, while in time series investing, it’s often the sole signal driving asset rotation.
4. Market Timing Through Historical Data
Rather than holding assets through all market conditions, both approaches incorporate elements of market timing. By using historical performance to identify favorable or unfavorable periods for each asset, they avoid traditional buy-and-hold’s exposure to all market cycles. In time series investing, timing relies on an asset’s long-term trend; dual momentum adds an extra layer by factoring in how assets perform relative to each other.
Key Differences: Where Dual Momentum Extends Beyond Time Series
While both approaches share fundamental principles, dual momentum extends the time series approach by adding relative momentum to its strategy. This extra dimension means dual momentum not only examines how an asset is trending over time but also how it performs compared to its peers. The result is a dynamic, comparative angle that enables dual momentum to focus on both the best-performing asset classes and those that meet positive absolute momentum criteria.
Practical Applications and Portfolio Insights
For investors, understanding the commonalities between dual momentum and time series investing opens up new avenues for strategy customization:
- For Higher Risk Tolerance: Investors can focus on relative momentum, allowing for potential returns by rotating among top-performing assets.
- For Risk Mitigation: By emphasizing absolute momentum within dual momentum or by following a time series strategy alone, investors can achieve a more conservative profile, reducing exposure to bear markets.
Blending elements from each approach offers versatility and resilience, making these strategies powerful allies for those seeking both growth and stability.
Conclusion
Dual momentum and time series investing, while distinct, share a commitment to capturing momentum-driven returns while minimizing exposure to downturns. By understanding their common foundations—absolute momentum, rule-based processes, and trend-following principles—investors can harness the strengths of both. For those seeking a flexible yet disciplined approach, exploring the synergies between these strategies could lead to more robust, adaptable portfolios.
By looking “beyond” dual momentum, investors gain insights into time series momentum and unlock tools to further optimize their trend-based investments.