Global Equity Momentum – A Craftsman’s Perspective

Outer space is a riot of activity if you can watch with a sufficiently powerful telescope. Building a single telescope large enough is impossible, so astronomers build arrays: huge series of small telescopes that work together as one telescope.

The Very Large Array consists of 27 80-foot radio dishes that acts as a single telescope with the same resolving power as a single telescope 22 miles in diameter – larger than New York City, with all its boroughs.

The same concept has been applied by the winners of many Machine Learning competitions over the past few years, and can be applied successfully to improve the resolution of financial models, with astonishing benefits.

Our NEW comprehensive whitepaper explores Dual Momentum – Global Equity Momentum – to drill down on rarely discussed concepts that are highly impactful to the success of any quantitative investment strategy.

Some key takeaways:

  • The choice of a single model specification may be a large and uncompensated source of risk.
    • We observe average total return dispersion of over 64 percentage points for different specifications of Global Equity Momentum over rolling 5-year periods.
  • The most sensible estimate of future performance for any reasonable strategy specification is the median performance across all reasonable strategy specifications.
    • The original specification of Global Equity Momentum outperformed in-sample but regressed to the median out-of-sample
  • Combinations or “ensemble” strategies produced greater portfolio sustainability, higher potential withdrawal rates, and a smaller range of terminal wealth over finite horizons that matter to most investors.

Importantly, we also explore ways to mitigate the effects of higher turnover, and show that the benefits of ensemble methods persist on an after-tax basis.

Ensemble approaches enhance the chances that the promise of an investment strategy will actually accrue to an individual investor over their particular investment horizon. Learn how to make ensembles work for you and download our paper now!

 

You can also read the executive summary of this paper on our blog.