Commodities and Countries Update

I added in the combined the j/k momentum model and the TAA model for the commodity and currency strategies I described yesterday(before it was only TAA, but I know follow the guidelines described in this post). The results confirmed the reasoning in yesterday's post. Commodities historically (tested since 83) do not have a very powerful momentum strategy. However, the j/k strategy with countries and the TAA model combined outperforms using the TAA model individually on each country. However, the TAA model generates very few signals and would be better for a longer-term investor. The j/k model (with j=4, k=2, and investing in the top 25%) with TAA overlay has a CAGR/Stdev of 2.18 (CAGR: 9.5%) compared to .99 (CAGR: 12.4%) for the EAFE TAA strategy. The EAFE without currencies in the TAA has a Sharpe of about 1 and 1.14 with them. Those increase to 1.07 and 1.23 (1.04 and 1.19 for yesterday's). However, regressing the new excess returns on the individual TAA excess returns does not generate significant alpha (annualized 26 bps), but the Beta is only .81. Unlike yesterday's strategy (ex-currencies), this strategy does have a significant alpha (at 10%) of 50 basis points relative to the original TAA strategy with a Beta of .78 (it improves to significant at 5% with 55 basis points with the currencies relative to TAA with currencies compared to 30 bps for the strategy yesterday).

* 50% decreases the Sharpe of the foreign strategy by themselves, but increases the Sharpe of the OVERALL strategy, I just wanted to be consistent with previous posts

addendum: I should note that the returns to this strategy are over a long period of time, particularly since the currency strategy benefits from high interest rates. The Sharpe ratios come down significantly over the past ten years compared to the past thirty years. Since the strategy has maintained a more constant growth path (ie not the early/mid 80s), the country strategy improves the Sharpe from .83 to .96 for the TAA strategy (individual country TAA is .93). However, the inclusion of the currency strategy has a smaller effect (I don't take into account the declining value of the dollar on any assets besides currencies, so this could be understated) increasing the Sharpe ratio by .04-.05. It seems that compared to the 50% momentum strategy over the past ten years, the EAFE has outperformed historically so that the momentum strategy is relatively constant, but the EAFE outperforms. (.4 10 year Sharpe vs. .1 30 year) in the past few years. I'm not sure how long the EAFE will continue to outperform, but I would prefer the less volatile Sharpe ratio. Right now my thinking is that after taking into account the depreciation of all of these assets in dollar terms, the best cash strategy would be the currency strategy, but I'm not sure yet.