Global Asset Allocation Use of momentum in trading across industry sectors Yuri Krapivin Yuk Ping Ng Pierre Oustinow Jonathan Steinmetz Terence Tong

Agenda Objective Objective Implementation & Methodology Implementation & Methodology Results Results Improvements Improvements

Objective Develop and test a momentum based strategy to trade across Industry Sectors Develop and test a momentum based strategy to trade across Industry Sectors

Implementation Data: Data:  130 S&P500 sectors  Monthly returns from Jan 83 to Mar 00 Principle: Principle:  Sort according return (univariate model)  Form BUY and SELL portfolios  Take new position every month

Methodology - Portfolios BUY Portfolio BUY Portfolio  Top x% performers in terms of total return for periods varying between 1 month and 1 year in the past SELL Portfolio SELL Portfolio  Worst x% performers

Methodology – Trading positions Monthly trading positions: Monthly trading positions:  Long “BUY portfolio” for a period varying between 1 month and 1 year  Short “SELL portfolio” for a period varying between 1 month and 1 year  No cash investment: Short position finances Long position

Results – Portfolio composition Sample: Jan 84 - Dec 94 Sample: Jan 84 - Dec 94 Higher total returns achieved for: Higher total returns achieved for:  Portfolios: top / bottom 5%  Trading position (backward / forward):  1/1, 12/1, 12/6  Consistent across portfolio (fractile) composition

Results – Portfolio performance

Annual Results 12/6 W/O Knockout

Results – Returns w/o Knockout

Results – Returns w/ Knockout

Results In Sample: Knock out does not substantially improve performance In Sample: Knock out does not substantially improve performance Out of Sample: Knock out significantly decreases returns performance Out of Sample: Knock out significantly decreases returns performance Knock out should not be used in conjunction with a momentum strategy Knock out should not be used in conjunction with a momentum strategy

Theory Momentum effect is not sector specific but moves across sectors Momentum effect is not sector specific but moves across sectors A momentum based trading strategy should therefore account for momentum shifting across industry sectors A momentum based trading strategy should therefore account for momentum shifting across industry sectors

Improvements Calculate market exposure Calculate market exposure Consider other time periods Consider other time periods Extend to other asset classes and/or other markets Extend to other asset classes and/or other markets On / Off Trigger On / Off Trigger Optimize in conjunction with other asset classes Optimize in conjunction with other asset classes