Optimizing Returns: Dual Momentum Strategy on Low Volatility-Momentum Multi Factor Combo and Gold
Today, we’re diving deep into an analysis that applies a Dual Momentum strategy to a Low Volatility-Momentum combo, Gold, and Liquid Funds. We’ll explore how this approach compares to traditional benchmarks and other strategies, potentially offering investors a path to enhanced returns with managed risk.
The Strategies Explained
Before we delve into the results, let’s briefly explain the strategies we’re examining:
1. Low Volatility-Momentum (LV_MOM) Combo:
This strategy combines low volatility and momentum factors, aiming to capture the benefits of both reduced risk and positive price trends.
2. Absolute Momentum:
Applied to the LV_MOM combo, this strategy compares the yearly performance of LV_MOM with a Fixed Deposit (FD) return of 6% over a year. If LV_MOM’s yearly return > 6%, we remain invested in LV_MOM for the next month. If not, we invest in FD for the next month. This comparison is repeated monthly.
3. Dual Momentum:
This approach adds a relative momentum component. We compare the last 1-year performance of three options: Gold, LV_MOM combo, and FD (6% return). We invest in the option offering the best returns for the next month. This comparison is repeated monthly.
We’ve compared these strategies against the NIFTY index, Gold, and a Fixed Deposit (FD) benchmark over a period from 2009 to 2024.
Performance Analysis
Let’s break down the key performance metrics:
| Metric | NIFTY | GOLD | LV_MOM | ABSOLUTE | DUAL |
| — — — — — — — — — — — — — | — — — -| — — — | — — — — | — — — — — | — — — |
| Total Return (2009–2024) | 542% | 382% | 1374% | 849% | 1202%|
| CAGR | 12.1% | 10.1%| 17.9% | 14.8% | 17.0%|
| Max Drawdown |-46.3% |-24.4%|-44.5% |-22.9% |-17.0%|
| Risk-Adjusted Return (RoMAD)| 26.0 | 41.5| 40.3 | 64.6 | 100.3|
| 1y Rolling Return | 15.1% | 10.9%| 20.7% | 16.1% | 16.7%|
| 3y Rolling Return | 12.7% | 9.2% | 18.0% | 14.2% | 16.1%|
| 5y Rolling Return | 12.4% | 7.9% | 17.7% | 14.1% | 15.9%|
| Volatility | 21.2% | 14.9%| 19.3% | 13.4% | 14.6%|
| Bottom 25%ile Return | — | — | 3.31% | -2.27% |-3.24%|
Key Insights
1. Superior Returns: LV_MOM and Dual Momentum Outperform the Market
Both strategies significantly beat traditional benchmarks over the long term.
The LV_MOM strategy delivered an impressive 1374% total return, while Dual Momentum achieved 1202%, both far surpassing the NIFTY’s 542% and Gold’s 382%. This translates to CAGRs of 17.9% and 17.0% respectively, compared to NIFTY’s 12.1% and Gold’s 10.1%. For investors, this means potentially doubling their money in about 4 years instead of 6.
2. Risk Management: Dual Momentum Shines in Downside Protection
Dual Momentum strategy offers exceptional drawdown mitigation.
With a maximum drawdown of just -17.0%, Dual Momentum significantly outperforms both LV_MOM (-44.5%) and NIFTY (-46.3%) in protecting capital during market downturns. This lower drawdown, combined with strong returns, results in an impressive risk-adjusted return (RoMAD) of 100.3 for Dual Momentum, more than double that of LV_MOM (40.3) and nearly four times that of NIFTY (26.0).
3. Consistency: Both Strategies Offer Reliable Long-term Performance
LV_MOM and Dual Momentum demonstrate consistent outperformance over time.
Looking at rolling returns across 1-year, 3-year, and 5-year periods, LV_MOM and Dual Momentum consistently outpace NIFTY and Gold. For instance, in 5-year rolling returns, LV_MOM (17.7%) and Dual Momentum (15.9%) significantly outperform NIFTY (12.4%) and Gold (7.9%). This suggests that their superior performance is not just a short-term phenomenon but persists over various market cycles.
4. Volatility Management: Smoother Ride for Investors
Dual Momentum offers lower volatility, while LV_MOM balances volatility and returns.
Dual Momentum shows lower volatility (14.6%) compared to both LV_MOM (19.3%) and NIFTY (21.2%). While LV_MOM has slightly higher volatility than Dual Momentum, it compensates with higher returns. Both strategies offer a potentially smoother investment journey compared to the benchmark.
Potential Drawbacks
While these strategies show impressive results, it’s important to consider potential drawbacks:
1. Complexity:
Both strategies are more complex than simple index investing, potentially requiring more active management and expertise to implement effectively.
2. Tracking Error:
The significant outperformance means these strategies may deviate substantially from benchmark returns in the short term, which could be psychologically challenging for some investors.
3. Downside Performance:
While LV_MOM shows positive returns (3.31%) in its bottom 25th percentile, both Absolute (-2.27%) and Dual (-3.24%) Momentum strategies show negative returns in their worst quarters. This suggests that these strategies may still experience periods of underperformance.
Conclusion
The LV_MOM and Dual Momentum strategies, particularly when applied to a combination of Low Volatility-Momentum, Gold, and Liquid Funds, offer compelling advantages for investors seeking to enhance their portfolio performance. LV_MOM stands out for its superior total returns and consistent outperformance, while Dual Momentum shines in risk-adjusted returns and downside protection.
The Dual Momentum strategy, by dynamically allocating between LV_MOM, Gold, and Liquid Funds based on recent performance, provides a systematic approach to capturing the best-performing asset while offering downside protection. This approach has shown to deliver strong returns while managing risk effectively.
However, investors should carefully consider their risk tolerance, investment goals, and ability to stick with a strategy that may occasionally underperform in the short term. These strategies require more active management and may have higher trading costs due to monthly rebalancing.
As always, past performance doesn’t guarantee future results, and it’s crucial to consult with a financial advisor before making significant changes to an investment approach.
These strategies represent a powerful combination of modern investing techniques, potentially offering a path to enhanced returns with managed risk for those willing to venture beyond traditional index investing. The systematic approach to asset allocation based on momentum principles could provide a disciplined method for navigating various market conditions, balancing the growth potential of equities with the stability of gold and fixed income.
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Important Links
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