Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk

by Gary Antonacci

Quick Summary

Antonacci presents a compelling case for combining relative momentum (buying recent winners over recent losers) with absolute momentum (buying when an asset's return exceeds a threshold, moving to safety when it does not). The Dual Momentum approach, validated by extensive academic research, provides a simple, implementable strategy that has historically delivered equity-like returns with bond-like risk, outperforming both buy-and-hold and single-momentum strategies.

Detailed Summary

Gary Antonacci's "Dual Momentum Investing" presents one of the most elegant and well-researched investment strategies to emerge from the academic momentum literature. The book bridges the gap between academic research and practical implementation.

The early chapters provide essential background. Chapter 1 traces the history of indexing from the first index fund, establishing the baseline that most active investors fail to beat. Chapter 2 surveys the academic evidence for price momentum -- the tendency for assets that have performed well recently to continue performing well, and vice versa. This "anomaly" has been documented across virtually every asset class, time period, and geography studied, making it one of the most robust findings in financial economics.

Chapter 3 critiques Modern Portfolio Theory (MPT), showing that its assumptions (normal distributions, stable correlations, rational investors) are violated in practice, leading to portfolios that are less diversified and more vulnerable to crashes than MPT suggests. Chapter 4 explores rational explanations for momentum (risk-based factors, liquidity effects) and behavioral explanations (anchoring, herding, disposition effect, overconfidence, slow information diffusion), concluding that both likely contribute.

Chapter 5 evaluates various asset classes as building blocks for a momentum strategy, distinguishing between those with strong momentum characteristics (stocks, bonds) and those with weaker or more erratic momentum (commodities, real estate, alternatives). This analysis leads to a surprisingly simple portfolio construction.

The core of the book presents Antonacci's Dual Momentum model, which uses two complementary forms of momentum. Relative momentum compares the performance of assets against each other over the past 12 months, selecting the outperformer. Absolute momentum compares each asset's performance against a threshold (typically Treasury bill returns), moving to the safe asset (bonds or cash) when the risky asset's momentum turns negative.

The practical implementation is remarkably simple: at the end of each month, check whether the S&P 500's trailing 12-month return exceeds the Treasury bill return. If yes, invest in whichever has higher 12-month returns -- US stocks or international stocks. If no, invest in short/intermediate-term bonds. This rule-based approach captured most of the upside during bull markets while avoiding the worst of bear markets.

The backtested results are impressive: equity-like returns with dramatically reduced drawdowns. The maximum drawdown of the dual momentum strategy was a fraction of buy-and-hold equity drawdowns during major bear markets.

The book includes endorsements from Ed Seykota, James O'Shaughnessy, and other respected practitioners, lending credibility to the approach.