Thesis in Brief
Dual-momentum is a trend-following strategy that ranks its 24-stock universe — spanning mega-cap tech, financials, healthcare, consumer staples, and energy — by 60-day trailing return and holds only the strongest names. When a position's trend breaks, the strategy exits and moves to cash. The logic is simple: let winners run, cut losers early, never fight the tape.
Backtest Performance
Over a 451-day window, the strategy produced:
| Metric | Value |
|---|---|
| Total Return | 23.5% |
| CAGR | 12.52% |
| Sharpe Ratio | 0.95 |
| Max Drawdown | 15.67% |
| Win Rate | 28.79% |
| Trades | 136 |
| Turnover | 2,638% |
The headline numbers are reasonable for a momentum approach: a 23.5% return with a sub-16% drawdown and a Sharpe near 1.0 is a credible starting point. That said, the 28.8% win rate underscores that the strategy's edge comes from letting winners compound, not from being right most of the time. A high-turnover figure (2,638%) with flat FX costs suggests the universe is USD-denominated throughout, keeping execution friction predictable.
Walk-Forward Validation
The four-fold walk-forward tells a more nuanced story:
| Fold | Period | Return | Sharpe | Max DD | Trades |
|---|---|---|---|---|---|
| 1 | Aug 2024 – Jan 2025 | +5.85% | 1.23 | 3.92% | 20 |
| 2 | Jan 2025 – Jul 2025 | −7.31% | −1.05 | 17.15% | 60 |
| 3 | Jul 2025 – Dec 2025 | +25.59% | 3.32 | 4.04% | 16 |
| 4 | Dec 2025 – May 2026 | +13.34% | 2.15 | 7.43% | 42 |
Three of four folds are positive, and the most recent out-of-sample period (Fold 4) is the strongest on a risk-adjusted basis — an OOS Sharpe of 2.15 on a +13.34% return. Fold 3 is exceptional (Sharpe 3.32) but with only 16 trades, results may reflect a concentrated run rather than broad strategy robustness.
Fold 2 is the concern. A −7.31% return, Sharpe of −1.05, and 17.15% drawdown on 60 trades points to a choppy, mean-reverting market regime — exactly the environment momentum strategies struggle in. The validation gate correctly flags this: the Probabilistic Sharpe Ratio (PSR) of 0.893 and Deflated Sharpe Ratio (DSR) of 0.476 are below threshold, so the strategy has not passed automated validation despite the promising aggregate metrics.
Recent Activity: Full Cash
For the past six trading days (June 24 – July 1), dual-momentum has executed zero trades. Portfolio value holds at $10,000 — full cash, no open positions. This is consistent with the strategy's mechanics: no position in the universe has cleared the trend filter, so the strategy is correctly waiting on the sidelines.
This is not a malfunction — it is the strategy behaving as designed. Cash is a position.
Strengths and Risks
Strengths: The strategy's logic is transparent and well-grounded in factor research. Recent out-of-sample performance (Folds 3–4) is strong, and the move to full cash during uncertain conditions demonstrates genuine discipline.
Risks: The failed validation gate should not be dismissed. The DSR of 0.476 — which adjusts for multiple testing across 6 trials — suggests the edge may be thinner than raw returns imply. The volatile Fold 2 drawdown (17.15%) also shows this strategy can suffer meaningfully in choppy conditions, and high turnover amplifies that cost in live trading.
Bottom line: Dual-momentum is a coherent, disciplined strategy with a real out-of-sample track record. Its current cash stance reflects sound risk management. Before increasing position sizing or elevating its validation status, it would benefit from an additional fold or two of live data to confirm whether the Fold 3–4 recovery is durable or simply the tail of a favorable trend cycle.