Momentum vs. Reversion to Mean and how it impacts being diversified/hedged

[jmont42]

First Query: When I take all of your positions from multiple strategies and when I put them in a watchlist and scroll through the charts, it seems like the majority are momentum trades…QQQ, GLD, EIS, EPOL, etc. but then in your U.S. Sector strategy, it’s XLP and XLV and they are clearly defensive/reversion trades. From a portfolio management perspective, I never want to be all momentum or all reversion. Even your hedge strategy lately has been relying heavily on GLD which has been working great but it’s a momentum position and I don’t usually think of momentum positions as hedges. Am I wrong to be concerned about relying too heavily on momentum?

Second Query: For the last few months, the top 3 strategy has been over 50% allocated to GLD which has worked out great but as someone who is subscribed here primarily to manage risk…I’m surprised to see one of your best performing strategies and one that could be used as a portfolio, so exposed to one asset? Can you comment on that?

Thank you!

[Frank1 Grossmann]

Only our sector strategy has a mean reversion sub-strategy. In general, it is quite difficult to build well-performing mean reversion strategies. I think you can really say that it’s all about momentum. If something goes well, it goes well for quite some time.
Nearly all of our strategies are hedged with the same hedging strategy and if this one is in gold then every strategy will be on gold in the top three strategies. It just doesn’t make sense to hedge with treasuries if they are not doing well. Even if this would diversify a portfolio. Some of our strategies, however, invest also in lower volatility ETFs or stocks if markets go down which also make the strategy more defensive.
Regards Frank

[jmont42]

Thanks Frank for taking the time to respond. I understand what you said about the benefits of momentum and it gives me more confidence to trust the strategies. However, you didn’t really respond to my concern about the top 3 strategy being almost 50% in one position. It has worked out great and it’s hard to argue with success, but I’ve always been taught that diversification was key and it’s not good to be over allocated to any one asset. Any thoughts? Thank you.

[Author]

Posts