As we announced a few weeks back, our own Nathan Faber won 2nd place in the 2015 NAAIM Wagner Award paper competition for his research paper The Search for Crisis Alpha: Weathering the Storm Using Relative Momentum.
Here's the abstract:
Tactical strategies are becoming more prevalent in the marketplace, especially for downside protection. While many of these strategies “go-to-cash” for protection during times of market turmoil, a number of asset classes and strategies, such as long volatility assets, managed futures, equity exposure management, and low volatility equities, have been able to deliver crisis alpha – strong performance over a risk-free asset during market crises – allowing investors to increase returns despite broad market losses.
In this paper, we introduce an easily accessible strategy, using relative momentum on U.S. Treasury investments (constant maturity indices and liquid, low-cost ETFs), to increase crisis alpha in a portfolio. We demonstrate over the period from 1962-2014 that the tactical methodology added significant crisis alpha relative to static fixed income investments (i.e. each individual asset and an equal weight portfolio). Next, we analyze the strategy separately over periods of rising and falling interest rates. We then utilize this strategy as the “safety asset” in a popular tactical investment strategy to increase both absolute and risk adjusted returns versus simply going to cash.
Finally, we look at a current investable version of the strategy using liquid fixed income ETFs and discuss some practical aspects of the implementation and possible improvements to the methodology.
You can access the full paper here.