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Weekly Research Commentary from Newfound Research

Fragility Case Study: Dual Momentum GEM

  • Recent market volatility has caused many tactical models to make sudden and significant changes in their allocation profiles.
     
  • Periods such as Q4 2018 highlight model specification risk: the sensitivity of a strategy’s performance to specific implementation decisions.
     
  • We explore this idea with a case study, using the popular Dual Momentum GEM strategy and a variety of lookback horizons for portfolio formation.
     
  • We demonstrate that the year-to-year performance difference can span hundreds, if not thousands, of basis points between the implementations.


     
  • By simply diversifying across multiple implementations, we can dramatically reduce model specification risk and even potentially see improvements in realized metrics such as Sharpe ratio and maximum drawdown.


Corey Hoffstein and Justin Sibears

   

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