Learning to Play Offense and Defense: Combining Value and Momentum from the Bottom Up, and the Top Down
10 Pages Posted: 8 Oct 2015
Date Written: October 4, 2015
Sorting stocks based on value and momentum factors historically has led to outperformance over the broad US stock market. However, any long-only strategy is subject to similar volatility and drawdowns as the S&P 500. Drawdowns of 50%, or even 60-90% make implementation of a stock strategy very challenging. Is there a way to add value on stock selection, but also reduce volatility and drawdowns of a long only strategy with hedging techniques? In this paper we examine the possibility of following a strategy that combines aggressive offense and smart defense to target outsized returns with manageable risk and drawdowns.
Keywords: stocks, bonds, futures, hedging, tail, swan, risk, value, momentum, ETFs
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