Regime indicator
A factor-level momentum filter applied to the strategy itself. The circuit-breaker that turns a quality long-only portfolio into a defensively timed exposure.
Strategy's trailing 3-month return is positive. Fully invested in the top quality + momentum candidates.
Trailing 3-month return turns negative. The other 50% sits in cash. Reactivates as soon as the trend recovers.
Why factor-level, not market-level?
Most "trend-following" filters look at the broad market index. This one looks at the strategy's own performance. The reason: quality-momentum may underperform in a market that is rallying (e.g. the junk rallies of 2009, 2020, 2023). Market-level filters would keep you fully invested in those exact moments where the strategy is losing relative ground.
Watching the factor's own drawdown is a sharper signal. It catches regime shifts within the strategy before they become deep drawdowns.
Empirical impact (2007-2026)
| Metric | Without regime | With regime |
|---|---|---|
| Annualized return | 14.1% | 13.7% |
| Annualized volatility | 18.5% | 16.1% |
| Sharpe ratio | 0.65 | 0.73 |
| Max drawdown | −38.7% | −31.0% |
Trading off ~40 bps of return per year for a 770 bps reduction in maximum drawdown and a meaningful Sharpe improvement.
A note on naming
We avoid calling this "market timing." The signal is endogenous, non-discretionary, and rule-based. It's closer in spirit to Moskowitz, Ooi and Pedersen's (2012) "Time-Series Momentum", applied to a single factor rather than asset classes.