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Since Trend Following is a binary model while Economic Regime is a blended allocation model (i.e. 0/100% or 60/40%), the combined model allows us to blend the signals and also ensure there are no abrupt and aggressive changes in allocation.Secondly, using multiple models helps reduce reliance on any one model and thus improves resilience and ensures robustness.Finally, the two signals are completely independent of one-another as one uses prices as the input variable (trend-following) while the other uses a composite of economic indicators for regime signaling. The ensemble model had an average allocation of just 55% over time, suggesting no unnecessary overweight on momentum all the time to generate alpha over an equal weighted model.The model generated an annualized alpha of 5 percentage points over its 60/40% Momentum & Low Volatility Combo counterpart and 12 percentage points over NIFTY 500 TRI. The performance is generated with consistency as is evident by the superior hit ratios, Sharpe & Sortino ratios and lower drawdowns.Additionally, the model works far better than a 60/40% static allocation to Momentum (be it based on NIFTY 200 or Midcap 150) consistently.
Ensemble Model
Model
Weight
Trend Following
60%
Economic Regime
40%
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Backtest Period: 1st April 2005 to 30th April 2025
Performance Consistency: The relative performance charts (ratio vs benchmark) display that the strategy has never had long period of underperformance versus relevant benchmarks such as NIFTY 500 TRI and the NIFTY500 MULTICAP 50:25:25 TRI index.
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