Sample strategy #5 – Momentum and Style Rotation Effect
Oh yes, it is.
Multiple research papers show it is possible to apply momentum strategies to successfully rotate between equity styles (small cap value, large cap growth etc.). This approach gives investors an ability to exploit periods of strong performance of particular investment styles together with the possibility to move out of the style during periods of its underperfomance. And do you know what is the best news? It is simple. Various equity style portfolios are easily accessible via low cost ETFs. The practically zero correlation to broad equity market (in long-short version of this strategy) is an extra bonus which makes this strategy an easily accessible good portfolio diversifier.
The source paper written by Tibbs, Eakins, DeShurko can be found on the following web page: http://www.mta.org/eweb/docs/pdfs/2008DowAwardWinner.pdf
Indicative performance is over 9% and estimated volatility is around 16% which means Sharpe Ratio of 0.33. Although the Sharpe ratio isn't high, it is more than offset by the strategy's simplicity and low correlation with the equity market.
Our strategy overview with extracted trading rules and hypothetical performance chart with probability bands can be accessed here: http://quantpedia.com/screener/Details/91
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