Alpha Momentum Portfolio - August, 2019 - First Rebalance & Performance Report


As per the Alpha Momentum Strategy, trend signals in US equities are up. As such, the model portfolio will remain fully invested. We will make changes to the model portfolio to reflect the following composition as of close tomorrow.



It has been a relatively difficult time period to be invested in this strategy over the last 10 months. Not only is the strategy in drawdown, but it is trailing its benchmark by about 20%! Unfortunately, this type of performance, while not common in the backtest, has indeed occurred in historical testing.

Just as a systematic trader should assume that his worst drawdown will be worse than his worst backtested drawdown, he should assume that his worst period of relative underperformance will likely be worse than his worst period of backtested underperformance.

These periods of drawdown and underperformance can make a system very difficult to stick with. The best way to handle this discomfort is to step back and reexamine the research behind the strategy and think about why you started trading it to begin.

On our page titled “Data, Supporting Evidence, In-Depth Discussion,” we wrote the following on The Alpha Momentum Strategy:

So is this the holy grail?

NO! Since this is a systematic or rules-based strategy, the mental cost of decision making in the portfolio management process is significantly reduced relative to a discretionary trading strategy. That said, in order to achieve the results of the strategy, an investor has to faithfully commit to actually trading the strategy. There will be times when the strategy underperforms Buy & Hold, sometimes these times of underperformance will be extended in duration, and sometimes the underperformance will be significant (for example, there were three periods - early 1989, early 1991, early 2010 - when the system underperformed buy & hold on a trailing 12 month basis by 20% or more). An investor would need the fortitude to stick with the strategy throughout these periods of relative underperformance in order to reap the benefits of the strategy. There is no easy way around this. Any strategy that significantly outperforms passive investing will have times of underperformance - this is the way of the investment world, and anyone who tells you differently is likely trying to con you. Before starting to trade a system, it is important that an investor understands that there will be periods of underperformance and has committed to seeing the strategy through these difficult times.

For more context on the strategy, you can read through the OVERVIEW and discussion pages, and for context on periods of underperformance, you can read through THIS article.

Thanks for following along!