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.
Newfound Research was awarded ETF.com's 2016 ETF Strategist of the Year
Investing at the intersection of thoughtful, quantitative research and behavioral finance, Newfound Research is dedicated to helping clients achieve their long-term goals with research-driven, systematically-managed portfolios, while simultaneously acknowledging the importance of managing the quality of the journey along the way is just as important as the destination.