Backtesting Dual Momentum Strategy : Analysis with NIFTY and Gold
Investors are always on the lookout for strategies that offer high returns while minimizing risk. One such strategy that has gained attention in recent years is the Dual Momentum Strategy. In this post, we’ll delve into the results of a backtest conducted from 2014 to 2024, using NIFTY and Gold as the primary assets. The findings reveal a compelling case for this strategy’s efficacy in outperforming traditional investments. Let’s dive in!
What is the Dual Momentum Strategy?
The Dual Momentum Strategy leverages the concept of relative momentum to make investment decisions. Here’s how it works:
- Relative Momentum: Compare the 200-day returns of NIFTY and Gold.
- Absolute Momentum: Compare the 200-day returns of each asset to a benchmark, which in this case is a 200-day Fixed Deposit (FD) return.
The strategy operates under the following rules:
- Go Long on NIFTY: When NIFTY’s 200-day returns exceed those of Gold and the 200-day FD returns.
- Go Long on Gold: When Gold’s 200-day returns surpass those of NIFTY and the 200-day FD returns.
- Park in Fixed Deposit: When neither NIFTY nor Gold outperform the FD returns.
This approach ensures that capital is allocated to the asset that is expected to perform the best over the near term, while mitigating risk by shifting to the relative safety of Fixed Deposits when market conditions are unfavorable.
Backtest Results: 2014–2024
We conducted a backtest of this strategy over a decade, from 2014 to 2024. The results were nothing short of impressive.
Absolute Returns
- Dual Momentum Strategy: 382.33%
- NIFTY: 184.65%
- Gold: 156.50%
The strategy significantly outperformed both NIFTY and Gold, achieving an impressive absolute return of 382.33%.
Compound Annual Growth Rate (CAGR)
- Dual Momentum Strategy: 18.79%
- NIFTY: 12.13%
- Gold: 10.86%
The strategy maintained a higher CAGR compared to NIFTY and Gold, showcasing its superior growth potential.
Maximum Drawdown (Max DD)
- Dual Momentum Strategy: -11.42%
- NIFTY: -34.00%
- Gold: -21.44%
Lower maximum drawdowns indicate reduced risk and better resilience during market downturns.
Return on Maximum Drawdown (RoMAD)
- Dual Momentum Strategy: 165%
- NIFTY: 36%
- Gold: 51%
The RoMAD metric highlights the strategy’s ability to generate returns while maintaining lower risk.
Rolling Returns
1-Year Rolling Return:
- Dual Momentum Strategy: 19.96%
- NIFTY: 14.72%
- Gold: 10.80%
3-Year Rolling Return:
- Dual Momentum Strategy: 21.82%
- NIFTY: 14.15%
- Gold: 10.34%
5-Year Rolling Return:
- Dual Momentum Strategy: 22.33%
- NIFTY: 13.20%
- Gold: 11.60%
The strategy consistently outperformed over different time horizons, demonstrating its robustness.
Key Takeaways
- Superior Returns: The Dual Momentum Strategy significantly outperformed both NIFTY and Gold, achieving an absolute return of 382.33% and a CAGR of 18.79%.
- Lower Risk: With a maximum drawdown of -11.42%, the strategy offered a much safer investment profile compared to NIFTY (-34.00%) and Gold (-21.44%).
- Consistent Performance: The strategy’s rolling returns over 1-year, 3-year, and 5-year periods were consistently higher, ensuring steady growth.
This backtest demonstrates that the Dual Momentum Strategy is not only effective in enhancing returns but also in managing risk, making it an attractive option for long-term investors.
Conclusion
The Dual Momentum Strategy, by dynamically allocating investments between NIFTY, Gold, and Fixed Deposits, proves to be a powerful tool in an investor’s arsenal. Over the past decade, it has delivered outstanding returns with minimal risk, highlighting its potential to be a game-changer in the world of investing.
If you’re interested in implementing this strategy or want to explore more about its nuances, check out our detailed analysis and step-by-step guide in our latest YouTube video. Don’t forget to like, share, and follow us for more insightful investment strategies!
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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always conduct your own research or consult with a financial advisor before making investment decisions.
