Dual Momentum

Dual momentum is a systematic allocation and selection framework developed by Gary Antonacci that uses two distinct momentum signals: absolute momentum compares an asset’s recent returns against cash (or zero), while relative momentum ranks assets against each other. The approach aims to avoid major downturns by moving to cash when trend deteriorates and to select outperformers by rotating among the top-performing asset classes.

Two types of momentum

Dual momentum rests on a simple but powerful distinction. Absolute momentum asks whether an asset has been rising in real terms—whether its 12-month return exceeds the return on cash or short-term Treasury bills. This measures trend: is this asset in an upswing or a downswing? If US equities have returned 5% over the past 12 months and cash returns 4%, equities have positive absolute momentum. If they’ve returned −5%, they have negative absolute momentum.

Relative momentum compares an asset’s returns to its peers. Among stocks, it might rank the top 20% of names by 6-month returns and buy the strongest; these stocks have positive relative momentum to their universe. In a broader context, it ranks asset classes: does US equity outperform US bonds? Does US equity outperform emerging market equity? Relative momentum identifies the winner in each category, even in periods when all assets fall—a downturn is less damaging if you own the least-bad option.

Antonacci’s insight is that these two signals reinforce each other. In bull markets, both absolute and relative momentum point upward—equities climb in real terms and outperform bonds. In bear markets, absolute momentum turns negative (equities underperform cash), and the strategy moves to cash or the safest asset, sidestepping losses. In down markets where some assets fall less than others, relative momentum still identifies the strongest performer, but absolute momentum prevents chasing a sinking ship.

The mechanics: timing and selection

A classic dual-momentum system works in two steps:

1. Check absolute momentum: Calculate the 12-month return for each major asset class (US equity, international equity, bonds, commodities, etc.) against short-term Treasury returns. If absolute momentum is positive, proceed to relative selection. If negative, move to cash or short-term bonds.

2. Rank relative momentum: Among the asset classes with positive absolute momentum, select the one (or top few) with the highest 6- or 12-month returns. Allocate the portfolio to the strongest performer(s).

Monthly or quarterly signals are recalculated; the portfolio rebalances if the top performer has changed. Holding periods are typically 1–3 months before the next signal, allowing trends to persist while being responsive to regime shifts.

The 12-month lookback for absolute momentum captures structural trends—bull and bear markets, economic cycles. The 6-month or 3-month lookback for relative momentum captures faster rotations among stronger performers. The combination is designed to be faster than simple buy-and-hold but slower than pure technical trading, reducing whipsaw and transaction costs.

Why dual momentum works

Research by Antonacci and others has demonstrated that absolute momentum is a genuine return driver, independent of traditional risk factors. In decades of data across asset classes and markets, a simple strategy of being long when the 12-month return exceeds cash and moving to cash otherwise would have avoided most major declines while capturing upside. The power lies in simplicity: no complex assumptions, no model fitting, just a clear rule.

Relative momentum within a set of assets amplifies returns. A portfolio that always holds the best-performing asset class over a lookback period would have outperformed any single buy-and-hold allocation, even after accounting for rebalancing friction and taxes. The key finding is that momentum is persistent, not random—assets that rise tend to rise for several months more, while declining assets typically keep declining.

Combining the two creates a natural market-timing mechanism. Investors often struggle with the question: “Should I be fully invested or should I raise cash?” Dual momentum answers it rule-based: full (or close to full) allocation when absolute momentum is positive, cash when it flips negative. This avoids the psychological trap of “missing the recovery” that keeps many investors fully invested through downturns, while also avoiding being out of the market when the next bull run begins.

The strategy also implicitly manages volatility and tail risk. Moving to cash reduces portfolio beta and limits drawdown in severe downturns. It is not a perfect hedge—there are 1-2 month lags in signals, so the worst of a collapse is often captured before a switch to cash—but it is substantially better than passive buy-and-hold over multi-decade periods.

Implementation challenges

The most common pitfall is data-mining risk. Antonacci’s framework was developed and published, so its historical outperformance is known; it may already be priced into market expectations. New entrants implementing dual momentum today will not replicate historical results exactly because the strategy is no longer a hidden inefficiency.

Whipsaws are another challenge. In choppy, range-bound markets, absolute momentum may flip positive and negative month to month, triggering costly rebalancing and taxes. During the 2015–2016 oil crash and recovery, or in early 2022, the system would have switched to cash, missed a recovery, switched back, and missed gains—a frustrating pattern that tests discipline.

Absolute momentum can be dangerously slow. In a mild bear market, the 12-month return might hover just above or below cash returns, meaning the signal flickers. Some practitioners adjust the threshold: a 3–4% premium above cash rates before committing to cash. Others use shorter lookbacks (6 months) to be more responsive, though this increases whipsaw.

Selecting among asset classes is also non-trivial. If you rank only US and international equities, you will rarely be in cash (equities have positive real returns most of the time), and the strategy offers little downside protection. Including bonds and other diversifiers expands the universe but introduces currency risk and lower-returning periods. The universe selected fundamentally changes the strategy’s behaviour.

Variations and practical use

Many practitioners implement dual momentum within a specific asset class. A relative-momentum-only stock-picking strategy ranks individual equities by 6-month returns and buys the top 20%, rebalancing monthly. This removes the market-timing element but captures the selection effect. Others combine dual momentum with factor investing, using momentum as one of several quantitative signals.

Hedge funds and managed-futures funds often use momentum-based approaches alongside absolute-momentum concepts; they shift exposure based on whether a trend is present, not just on valuation. The philosophy—that trend following reduces catastrophic losses—has deep roots in commodity trading and systematic macro strategies.

For individual investors, the challenge is discipline. A signal to move to cash during a scary moment requires conviction. Many investors who adopt the framework abandon it after the first whipsaw, returning to buy-and-hold or reactive panic selling. The framework’s strength lies in its mechanical nature: remove emotion, follow the rule.

See also