Over the past few years, I've gravitated toward multi-strategy thinking. What strategies tend to do well when momentum underperforms for a few years? What strategies have a low correlation with momentum that can help diversify it?
The strategies have been debated in academic papers for decades, so they're not hard to find. Integrating them into a portfolio is more of a challenge.
The obvious way to combine strategies is to use leverage: for example, to reduce the market risk of a momentum strategy as much as possible, to do the same thing with a value strategy, and then to borrow money at a low rate in order to get exposure to both. There is a risk that momentum and value will both underperform at the same time and that the leverage will end up hurting the portfolio. Now imagine managing the risk of four or eight strategies integrated in the same way.
I've chosen not to go with the obvious method, but instead to pick from a universe of exchange-traded funds using a quantitative method to select funds based on multiple strategies. The tradeoff is the increased amount of information I have to process to actually put on a trade. Most people would say that this is more trouble than it's worth.
So far, I've hesitated to post about anything other than trend-following momentum using moving averages other than on the resources page. Most people aren't obsessed with trading, and information overload might cause them to give up on it completely.
That's why I've been posting the information overload links to a Facebook page for the past three years. If you really are obsessed, check it out:
Facebook Page on Quantitative Trading
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June 26, 2014
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