![]() ![]() The backtest confirms this theory, since the combined strategy using moving averages, has the largest return, the lowest volatility or drawdown, and the returns distribution is much more favourable. This correlation is statistically significant using a robust non-parametric test, and this result suggests that the two portfolios could be combined to achieve the best of the two approaches. However, the active factor strategy and market are negatively correlated. Lastly, the dynamical weights based on the strength of the signals is also a widely utilized approach that was found to be effective also in the factor universe.Īlthough the active factor strategy largely outperforms naive equal-weighting of the factors or signals alone, it would have been largely beaten by the market. Therefore, the weight of the factors should be adjusted based on signal interreactions. The blending of the factor seems to be important because the slow signals tend to be unreactive to changes in trend, and fast signals are often false alarms. The factor momentum also solves the problem of underperforming factors because of the wrong portfolio sort (for example, when growth outperforms value or big size outperforms small size). The same could be said about the momentum in factors since both the time-series and cross-sectional momentum strategies are well-examined and proved to be functional. *įirstly, the functionality of factor strategies was proven by numerous academic researches. * Are you interested in systematic quantitative factor ETFs? Here is a link to the Alpha Architect Value Momentum Trend ETF ( strategy background ), our partner, which combines international equities’ value, momentum, and trend factors. Throughout the paper, both EAFE and US market is analyzed, but we centre our attention only around the US market. A dollar invested in the would result in the 20.28 dollars by the compared to only 14.52 dollars for the Market portfolio. ![]() As a result, the combination has the largest return, the lowest volatility and max drawdown, and the highest risk-adjusted-performance. On the other hand, the factors tend to be flat when the market is largely profitable. ![]() The combined portfolio is weighted according to the number of “won” moving averages.įactors are profitable when the market is not, and by the construction, the combination strategy has the biggest allocation into factors when there is a market downturn. The paper sets a straightforward rule: look on the past 12 monthly moving averages of returns (from one- to twelve-months MA) for both strategies. Therefore, it is natural that the portfolios could be combined to get the best of them. However, the market portfolio and the smart factor strategy are significantly negatively correlated. Although the outperformance of dynamical weighting (smart factor strategy) compared to all other strategies is present on each market (US and EAFE) and each type of portfolio sort (quintiles, deciles and ventiles), the smart factor strategy would still be outperformed by a simple buy-and-hold market portfolio. The weights are represented by the ranks of the absolute values of signals – stronger the signal greater the weight. Moreover, all the factor can be dynamically weighted according to the strength of the signal. Therefore, the weight is set to one half. Slow signals tend to be unreactive to changes in trend, and fast signals are often false alarms. (2019), the signals can be combined to either trade only if both signals agree, or adjust the weights if the signals do not agree. Both signals can be used independently, but the results suggest that it is better to employ the information contained in both of the signals. Firstly, the paper examines two signals: fast, which is 1-month momentum and slow, which is 12-month momentum. As an active strategy, the paper examines the factor momentum strategy, where the numerous factors represent all the main investment styles such as value, momentum, size, quality or volatility. The outperformance of active and passive strategies is cyclical. Is active or passive investing better? The answer to this question is time-varying. Design multi-factor multi-asset portfolios. ![]()
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