Momentum On Dual Momentum Portfolios

By: Marco Simioni

In the first section, this article describes a Dual Momentum study over an iShares country etfs basket with a new attempt to improve this well-known investing style. I chose iShares because it is the world largest family of Exchange Traded Funds (ETFs) from BlackRock. Although different stock markets correlations have become weaker and weaker in these last 10 years, this article easily shows that countries diversification is still feasible.

In the second part, I briefly recall another Dual Momentum Portfolio, the Famous 5 Portfolio, and apply to momentum concept to the two portfolios. This results in a new comprehensive strategy that rotate monthly from Countries Portfolio to the Famous 5 Portfolio or viceversa.

My backtest, highlight that momentum persists not only through single different assets (etfs) but through portfolios as well.

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Combining diversified alpha to deliver superior Sharpe

By Marcus Williamson

In this article I show that very basic quantitative trading strategies that generate returns from different market behaviours, when combined, can provide a more desirable and stable returns stream, as reflected in a Sharpe ratio higher than any individual strategy. We show how absolute returns can be some-what ‘sacrificed’ for an improved risk adjusted return stream, which then can be later leveraged as per the investors risk appetite. Read more

Introduction to Monte Carlo Analysis Part 1

By Bonolo Molopyane

The Monte Carlo, filled with a lot of mystery is defined by Anderson et al (1999) as the art of approximating an expectation by the sample mean of a function of simulated variables.  Used as a code word between Stan Ulam and John von Neumann for the stochastic simulations they applied to building better atomic bombs (Anderson, 1999), the term Monte Carlo evolved into a method used in a variety discipline including physic, finance, mechanics and even in areas such as town planning and demographic studies.

Monte Carlo methods are very different from deterministic methods (McLeish, 2004). In the case of a deterministic model the value of the dependent variable, given the explanatory variables, can only be unique value as given by a mathematical formula. This type of model contains no random components (Rotelli, 2015). In contrast, Monte Carlo does not solve an explicit equation, but rather obtains answers by simulating individual particles and recording some aspects (tallies) of their average behavior (Briesmeister, 2000). Given the broad applications and matters involving Monte Carlo Methods we will split this article into three parts to allow for a clear understanding. Read more

Momentum Strategies

By Rutendo Kadzikano

Pinto, Henry, Robinson and Stowe (2010) define momentum indicators as valuation indicators that are based on the relationship between price or another fundamental, earnings for example, to a time series of its historical performance or to the fundamental’s expected future performance values. When the strategy uses earnings then it is an earnings momentum strategy and in the case of using price then it is a momentum strategy. Momentum strategies can either be relative or absolute. Relative strategies compare the momentum of different assets to each other and absolute momentum is not concerned with the performance of other assets as it only focuses on that stocks past return in predicting future returns. Read more

Momentum Crashes

By Fortune Chiwewe

Seminal work by Jegadeesh and Titman (1993) found that past winners outperform past losers over a horizon of 3-12 months. Investors thus take a long position on winner stocks and a short position on loser stocks in order to realise anomalous profits. This strategy is widely adopted and appears to be timeless in terms periodically not functioning but never completely disappearing. This paper sets to investigate what happens when the strategy does not work, i.e. when momentum crashes. Read more

Optimal Stock Quantity, Selection and Weights for Momentum Investing

By Rujeko Musarurwa

To try and maximise return the correct recipe of ingredients must be brought together. Not only do we have to look at the quality of stock selection, but the weights and quantity of stocks required for maximising returns and minimising risk. Momentum investing looks to invest in top performing stocks and combining this technique with good diversification skills and portfolio optimisation should result top performing portfolios. An added benefit is that transaction costs will be minimised if the correct stocks are picked right from the beginning as less buying and selling will have to be done in the future.

This article will aim to answer the following three questions:

  1. How to pick the right amount of stocks to optimize a portfolio?
  2. How to pick the best stocks to include in the portfolio?
  3. How to get the weight for each stock in the portfolio right?

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Market Timing Models For A Momentum Strategy.

By Sandra Makumbirofa

Everyone has an opinion about what the state of the market will be in the short term or long term, never mind that stock prices follow a random walk or the possible clash between that comes between the invisible hand of the market and the regulatory rules made by policy makers.

Returns in the market are limited based on the performance among the wide range of asset classes over a period of time. In the face of such limitations, not every investor in the market can make a high return and in most cases the average investor will manage to earn an average return before the transaction costs are factored in. An efficient market timing model is thus believed to be an means to an end of this hurdle for the investor.

In this article I will make a suggestion of a suitable quantitative model of market timing that will enable us to determine the level of market exposure our momentum strategy should have. Section 2 gives evidence of the some of the market timing models that have worked empirically over the years. Section 3 is an introduction to regime based market timing models that have been chosen for our hedge fund. Section 3.1 introduces and briefly discusses the Hidden Markov Models and Section 4 will give a conclusion to the article. Read more

The Origins of Momentum

By Fortune Chiwewe

Momentum is a market anomaly which many people have tried to explain but have not succeeded to a satisfactory extent. As to the source of momentum profits, others have tried to rationalize their origins whereas an opposing school of thought has searched for their origins in behavioural finance. In this paper I will explore the possible origins of momentum profits through highlighting the important aspects of both the rational and the behavioural field. Read more

Crowd Sourced Alpha: The Search for the Holy Grail of Investing    

By Fortune Chiwewe

For the full presentation on crowd sourced alpha by Dr Jessica Stauth, Click Here, For the Slides, Click Here. Dr Stauth opened with a quote by Ray Dalio which pretty much sums up the fundamental objective of portfolio investment and diversification: “uncorrelated return streams are the holy grail of investing.” Traditional portfolio theory states that to achieve true diversification adding more assets or return streams to your portfolio leads to a better Sharpe ratio and more diversification only to the extent that the assets you add are truly new and not more of the same. The traditional model fails to achieve this because

  • Positive Sharpe streams are a moving target which require on-going research
  • Most investment teams lack diversity in terms of expertise and background making it challenging to surface new uncorrelated strategies
  • Large multi-manager firms are successful BUT the barriers to entry to these large firms industries are extremely high

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Behavioural theories behind momentum

 

By Rutendo Hazel Kadzikano

There isn’t a general consensus on what really causes momentum. On the one hand others argue using behavioural theories that state that momentum is a result of “naïve investors with biased expectations” Hvidkjaer (2006) and on the other hand, others argue that momentum is a product of the “rational response that individuals have to real market constraints” (Scowcroft & Sefton, 2005). Read more