Attached is a backtest of a modified momentum strategy from the base by Johnny Wu. Attached in the reply to this post is a base benchmark of the strategy using equal weighting. The strategy is as follows:
Long 3 stocks that have performed the best over the last year for one month. Each month, positions are adjusted or liquidated based on the new set of stocks screened.
The universe I have chosen is a proxy for a potential global portfolio of US sectors, europe, asia, commodities, bonds and real estate.
The portfolio construction method is done through traditional risk parity. I assume that all stocks have equal pairwise correlation and the model simplifies to where the % weight in one stock is equal to its inverse variance divided by the sum of all stock's inverse variance.
Comparing with this method to the equal sizing method, I see two important traits:
1) The 08' crisis was well hedged through non-us positions
2) Although drawdowns and volatility are lower than equal sizing, after 2010, the Risk budgeting method underperforms the SPY. This has led me to conclude that the momentum strategy may not be as robust in large bull markets.
3) Correlations seem to be much higher after 2010 as well, therefore, our portfolio is just generating returns through beta.
Anyone else have success with this method of construction? Furthermore, has anyone implemented the numerical solution to risk budgeting with unique correlations?
