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Frequent readers of our research notes will know that we are quick to point out specification risk (the often unintended bets that arise from process choices we make in our portfolios) wherever we see it.

With the S&P 500 dropping precipitously right into month end, many "do it yourself" tactical investors had to stare down the double barrel shotgun of rebalance timing luck and specification risk.

After all, what do you do when the 10-month moving average model you've been following says "abandon all hope," but that 12-month total return model you sometimes keep you eye on says, "things look clear from here."

In this week's research note, we demonstrate that the major trend-following models – time-series momentum, price-minus-moving-average, and double-moving-average-crossover – are all mathematically linked to one another.  And, knowing how they are linked, we can derive why they can give meaningfully different signals from time-to-time.  (PDF)


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What We're Reading
HEDGED: "For many investors, systematically buying puts month after month is not a viable strategy. This has been particularly true over the last several years, when market pullbacks have been shallow and short, and payouts on hedges have been compressed. But despite the challenges, hedging and risk management remains critical to an efficient portfolio design."  The Art of Hedging

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