The Thesis
Dual-momentum is a classic trend-following bet: hold the strongest-trending names in a 24-stock large-cap universe — ranked on 60-day return — and exit the moment a trend breaks. The universe is defensibly diversified across tech (AAPL, MSFT, NVDA), financials (JPM, V, MA), healthcare (JNJ, UNH), and staples (PG, KO, WMT). It's a well-understood factor with decades of academic support, and the strategy runs live on a $10,000 paper book.
Backtest Performance
On the full 451-day backtest, the numbers look inviting at first glance: +23.5% total return, a final equity of $12,349.63, and a 12.52% CAGR. Risk-adjusted, though, the picture cools — a Sharpe of 0.95 and a 15.67% max drawdown describe a strategy that earns its returns with real volatility.
Two details deserve scrutiny. First, the win rate is just 28.79% across 136 trades. That's characteristic of trend-following — a minority of large winners carrying a majority of small losers — but it demands discipline and patience to sit through. Second, turnover is 2,638%, extremely high churn that would be costly in a live account with real spreads and slippage. Fees here were a modest $136, but that assumes frictionless execution.
The Validation Verdict
This is where the strategy stumbles. The walk-forward validation returns passed: false. Across 4 folds, 3 were positive, but fold 2 (Jan–Jul 2025) lost 7.31% with a 17.15% drawdown and a −1.05 Sharpe — a reminder that momentum whipsaws badly in choppy, trendless regimes. The out-of-sample return of 13.34% and OOS Sharpe of 2.15 are encouraging, but the Deflated Sharpe Ratio of 0.476 — below the 0.5 confidence threshold — tells the real story once you account for the 6 trials run. The PSR of 0.893 is healthy, but DSR is the honest measure of whether this edge is real or lucky, and it doesn't clear the bar.
What It's Doing Right Now
Recent activity is telling: every scheduled run from Aug 24 through Aug 31 executed zero trades, leaving the book 100% in cash at $10,000. No name in the universe currently shows a strong enough 60-day trend to hold. That's the strategy behaving as designed — it declines to force positions in a directionless tape — but it also means dual-momentum is contributing nothing while it waits.
Balance Sheet
Strengths: a coherent, literature-backed thesis; genuine out-of-sample profitability; sensible cash discipline when trends are absent.
Risks: a failed validation gate driven by a sub-threshold DSR; punishing turnover; a low win rate that tests conviction; and clear regime dependence, as fold 2's drawdown shows.
Our read: dual-momentum is a legitimate strategy with a real vulnerability. The headline return is not the number to trust — the validation is, and it says not yet proven. We'd keep it live on paper, watch how it re-enters when trends resume, and treat any capital allocation as provisional until the deflated statistics strengthen.