Unlocking the Potential of Dual Momentum: 19% CAGR with MaxDD of 11% (2014-2024)

In the ever-evolving landscape of investments, strategies that promise both high returns and reduced risk are the holy grail for investors. The Dual Momentum Strategy is one such approach that has garnered attention for its potential to outperform traditional investment methods. Recently, we conducted a backtest of this strategy using NIFTY and Gold, spanning from 2014 to 2024, and the results were eye-opening. In this article, we’ll explore the details of this strategy, the methodology of our backtest, and the significant insights gleaned from our findings.

Unlocking new horizons in investment with Dual Momentum.

Understanding the Dual Momentum Strategy

The Dual Momentum Strategy is built on the concept of relative strength momentum, which seeks to capitalize on the outperforming asset while avoiding the underperforming one. Here’s how it works:

1. Relative Momentum: Assess the 200-day returns of NIFTY and Gold.
2. Absolute Momentum: Compare the 200-day returns of each asset to a benchmark, in this case, a 200-day Fixed Deposit (FD) return.

Strategy Rules:

• Invest in NIFTY: When NIFTY’s 200-day returns exceed those of Gold and the FD returns.
• Invest in Gold: When Gold’s 200-day returns surpass those of NIFTY and the FD returns.
• Invest in Fixed Deposit: When neither asset outperforms the FD returns, signaling a preference for safety.

This approach allows for dynamic allocation between equities, gold, and a fixed-income substitute, thereby ensuring a balanced and flexible investment strategy.

Backtest Overview: 2014–2024

We conducted a comprehensive backtest of the Dual Momentum Strategy over a decade (2014-2024) to evaluate its performance against traditional investments in NIFTY and Gold.

Performance Metrics:

1. Absolute Returns:

• Dual Momentum Strategy: 382.33%
• NIFTY: 184.65%
• Gold: 156.50%

The strategy achieved a staggering absolute return of 382.33%, significantly outperforming both NIFTY and Gold.

2. Compound Annual Growth Rate (CAGR):

• Dual Momentum Strategy: 18.79%
• NIFTY: 12.13%
• Gold: 10.86%

A higher CAGR underscores the strategy's capacity for consistent and superior growth over the years.

3. Maximum Drawdown (Max DD):

• Dual Momentum Strategy: -11.42%
• NIFTY: -34.00%
• Gold: -21.44%

Lower drawdowns highlight the strategy’s effectiveness in mitigating risk during market downturns.

4. Return on Maximum Drawdown (RoMAD):

• Dual Momentum Strategy: 165%
• NIFTY: 36%
• Gold: 51%

RoMAD is a crucial metric that showcases the strategy's ability to deliver robust returns relative to the risk involved.

Consistent outperformance across various time horizons underscores the strategy's resilience and adaptability.

Key Insights and Implications

1. Superior Returns and Risk Management: The Dual Momentum Strategy delivered exceptional returns while maintaining significantly lower drawdowns compared to both NIFTY and Gold. This balance of high returns and low risk makes it an attractive option for investors seeking long-term growth.

2. Adaptability in Market Conditions: The strategy's dynamic allocation allows it to adapt to varying market conditions, shifting to the best-performing asset class while parking funds in safer alternatives during downturns.

3. Enhanced Risk-Adjusted Performance: The high RoMAD of 165% emphasizes the strategy’s efficiency in generating returns relative to the risk undertaken, a critical consideration for risk-averse investors.

Practical Applications and Future Outlook

Implementing the Dual Momentum Strategy

For investors interested in implementing this strategy, here are a few steps to get started:

1. Regular Monitoring: Continuously track the 200-day returns of NIFTY and Gold, and compare them against FD returns to make informed allocation decisions.
2. Diversification: Use this strategy as part of a diversified portfolio to enhance returns while mitigating risk.

Future Prospects

Given the positive results from our backtest, the Dual Momentum Strategy holds promising potential for future investments. Its ability to adapt to market trends and reduce exposure to downturns makes it a robust choice for long-term financial planning.

Conclusion

The Dual Momentum Strategy has demonstrated remarkable performance in our backtest, providing a compelling case for its adoption in modern investment portfolios. By dynamically allocating investments between NIFTY, Gold, and Fixed Deposits, it has achieved superior returns with lower risk, making it an invaluable tool for both seasoned and novice investors.

If you’re interested in learning more about this strategy or exploring other investment insights, feel free to connect with me here on LinkedIn or check out our detailed YouTube video. Let’s continue to explore innovative ways to enhance our financial success!

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always conduct your own research or consult with a financial advisor before making investment decisions.