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ALGO TRADING & AI
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EXTENDING MOMENTUM INVESTING WITH GARY ANTONACCI
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EXTENDING MOMENTUM INVESTING WITH GARY ANTONACCI
A RESEARCH ON MOMENTUM INVESTING THAT UNCOVERS HOW A GLOBAL, CROSS-ASSET
APPROACH CAN REDEFINE YOUR INVESTMENT STRATEGY FOR ENHANCED RETURNS AND
MINIMIZED RISKS.
paperswithbacktest
Apr 07, 2024
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EXTENDING MOMENTUM INVESTING WITH GARY ANTONACCI
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Hello! Today, between two articles on artificial intelligence (last week and
next week), I offer you a deep dive in a paper I really liked, named Optimal
Momentum: A Global Cross Asset Approach from Gary Antonacci.
Despite its strong academic backing, highlighted by numerous studies and its
proven track record over various time periods and asset classes, momentum
investing isn't as widely recognized among everyday investors as one might
expect.
The interest of this paper is to delve into the essence of momentum investing
and to show how it can be optimized to enhance portfolio performance.
Algo Trading & AI is a reader-supported publication. To receive new posts and
support my work, consider becoming a free or paid subscriber.
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UNDERSTANDING MOMENTUM
Momentum investing is basically buying things that have been doing well recently
and selling those that haven't. This idea started a long time ago, around the
early 1900s, when experts noticed that if something did well one year, it often
did well the next year too.
The real research into this started in 1937 with Cowles and Jones, who noticed
that stocks doing better than average one year usually did better than average
the next year too. But this idea didn't get really popular until much later. In
the 1960s, a guy named Levy found out that if stocks did well in recent weeks,
they tended to keep doing well.
The big moment for momentum investing came in the 1990s thanks to researchers
Jegadeesh and Titman. They found that stocks that had been strong over the past
6 to 12 months did better than those that hadn't, which went against the common
belief that you can't consistently beat the market.
Their findings showed that the stock market isn't just random chaos; you can
actually spot patterns in how stocks perform over time, which was a big shake-up
to the old idea that you can't predict the market.
THE INNOVATION OF GARY ANTONACCI
Momentum investing started with picking individual stocks that had been doing
well, thinking they would continue to do well.
The core idea of Gary Antonacci is it expand this idea, not just looking at
stocks but at whole types of investments using ETFs. This made the investment
strategy more varied.
He particularly focused on global stock indexes divided into four world regions,
checking which ones benefited most from momentum investing.
Although these showed promising momentum results, they were also quite
unpredictable. To tackle this, Antonacci cleverly mixed in fixed income
investments (like bonds) into the strategy. Bonds were chosen when they were
outperforming stocks, providing a strategic way to switch between different
types of investments depending on their current success, aiming to boost returns
while managing risk.
The result is a strategy that did better than the usual ways of mixing stocks
and bonds. Adding other types of investments like gold made it even better,
showing that a mixed and smart approach could lead to better results with less
risk.
This new way of using momentum investing across different types of investments
worldwide is a big step forward, offering a smart tool for planning and
adjusting investment strategies.
* Using Bonds: Normally, momentum investing focuses on stocks. But Antonacci
found that adding bonds (which are usually less risky than stocks) to the
investment mix can provide a safety net when the stock market goes down. If
bonds are doing better than stocks, they get added to the portfolio, which
can help protect and even increase money in tough times.
* Adding Gold: Including gold in the portfolio is another way to diversify.
Gold doesn't usually move in the same direction as stocks or bonds, so it can
help steady the portfolio when the stock market is unpredictable. Antonacci's
research shows that adding gold can reduce risk and improve the overall
performance of the investment strategy.
IMPLICATIONS AND PRACTICAL APPLICATIONS
Gary Antonacci's study on momentum investing shows that using a strategy that
picks assets based on their recent success can really boost how well a portfolio
does. He suggests that instead of sticking with a set mix of investments, it's
smarter to adjust what you invest in based on which assets are doing well at the
moment. For example, if bonds are doing better than stocks lately, you might
want to invest more in bonds.
Traditionally, when people decide how to spread out their investments among
different types like stocks, bonds, or gold, they stick to a set plan. But
Antonacci believes it's better to be flexible and change your investment mix
depending on which assets are currently performing the best. This way, you're
not just diversifying by type of investment, but also by timing, taking
advantage of when different assets are doing well.
He also talks about using momentum investing both for long-term planning
(strategic momentum) and for making quick, responsive decisions (tactical
momentum) based on the market's current state. The iidea that momentum works at
two levels: relative and absolute, to enhance returns while reducing potential
downside risk.
1. Relative Strength Momentum (Relative Momentum): This aspect of the strategy
involves comparing the performance of different assets or asset classes
against each other over a specific period. The idea is to invest in the
assets that have performed the best relative to their peers. For example, if
you're comparing stocks and bonds, and stocks have outperformed bonds over
the last year, you would allocate more to stocks.
2. Absolute Momentum (Trend Following Momentum): This component involves
comparing the recent performance of an asset to its own historical
performance. If an asset's recent price is higher than its price from, say,
12 months ago, it demonstrates positive absolute momentum, and the strategy
would consider holding or buying the asset. If the asset's recent price is
lower, indicating negative absolute momentum, the strategy would suggest
selling or avoiding the asset.
The dual momentum strategy combines these two approaches by first selecting
assets with the strongest relative momentum and then filtering these selections
through the lens of absolute momentum. For instance, if equities show strong
relative momentum compared to bonds but demonstrate negative absolute momentum
(meaning equities have declined over the past year), the strategy would avoid
equities despite their relative strength and might shift to a safer asset class
like bonds or even cash, depending on the specific rules set for absolute
momentum.
By integrating both relative and absolute momentum, the dual momentum strategy
aims to capitalize on market trends while providing a mechanism to reduce
exposure during downtrends, thereby aiming to offer a more robust risk-adjusted
return profile than strategies that rely solely on either relative or absolute
momentum.
HOW CAN WE GO FURTHER?
We have reimplemented Gary Antonacci's strategy here, on Paper With Backtest.
Gary Antonacci's results for the 2005-2010 backtest period are confirmed, and we
have extended the backtest beyond 2010:
You can even run this backtest yourself at home by using the Python code of the
strategy that is available at
https://paperswithbacktest.com/paper/optimal-momentum-a-global-cross-asset-approach
(you need to be logged in to see it).
It's possible to go further than Gary Antonacci to improve the strategy. Here
are a few ideas:
1. Exploring More ETF Types: As the variety of ETFs grows, we can look into
creating ETFs for new kinds of investments, like cryptocurrencies or special
industry sectors. This research would check how these new investments fit
into momentum investing strategies and what their impact is on overall
results.
2. Mixing Momentum with Other Methods: We can try combining momentum investing
strategies with other ways people build their investment portfolios, like
mean-variance optimization. This could give a fuller picture of how to
arrange investments and might lead to stronger, more stable portfolios.
3. Using Momentum with Different Investments: Apart from stocks and bonds,
momentum strategies might also work with other kinds of investments, like
real estate or hedge funds. Future studies could find out if momentum
strategies are useful for these other types of investments.
4. Applying Machine Learning: Using machine learning to spot momentum trends
could be an exciting area to explore (see the AI module of the Algo Trading
Course). This could make momentum strategies more precise and effective in
algorithmic trading.
5. Looking at Why Momentum Works: Understanding the psychology behind momentum
investing and what drives market trends could offer deeper insights into how
and why momentum strategies work.
By investigating these areas, you can expand on Antonacci's findings, exploring
new ways to use momentum to improve investment results and handle risks.
CONCLUSION
Gary Antonacci's detailed research on momentum investing shows how using data to
make investment decisions can really pay off.
This study is a great example of how analyzing data can help make better
investment choices. By looking at how different types of investments have done
in the past, he found effective ways to use momentum strategies to improve
portfolio performance, especially important in the fast-moving world of
algorithmic trading.
His research clearly shows that spreading investments across various types of
assets using momentum strategies works better than sticking with traditional
methods. This proves that momentum investing can be a powerful tool to increase
investment success.
Antonacci's findings encourage us, as investors, to rethink our strategies,
pushing for a wider use of momentum strategies in putting together portfolios
and deciding on asset allocation. He suggests that we could benefit from a more
flexible and active approach.
And for those who want to go further, I recommend this video by Gary Antonacci:
Happy trading!
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support my work, consider becoming a free or paid subscriber.
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