Accelerating Dual Momentum — Inflation Protected (ADM-IP)
Developed by Engineered Portfolio · Dual Momentum · Med-High Risk
The Inflation Protected variant of Accelerating Dual Momentum enhances the original ADM framework by adding a second defensive asset alongside long-term Treasuries: Treasury Inflation-Protected Securities (TIP). Published by the Engineered Portfolio research team as a companion to the base ADM strategy, this modification directly addresses ADM's most significant vulnerability — its reliance on a single defensive instrument that can fail catastrophically during inflationary environments.
The original ADM strategy uses long-term Treasuries (TLT) as its sole refuge during equity bear markets, exploiting the historical flight-to-quality effect where government bond prices rise as equity prices fall. This relationship held reliably for decades, but the 2022 rate shock exposed its fragility: when the Federal Reserve aggressively raised interest rates to combat inflation, long-term Treasuries suffered their worst losses in over forty years — simultaneously with equity declines. An ADM portfolio that shifted to TLT for protection found its defensive position losing money alongside the equities it had exited, negating the entire purpose of the protective rotation.
ADM-IP resolves this by giving the defensive side a choice between two instruments with different risk characteristics. When absolute momentum turns negative and the portfolio exits equities, it dynamically selects whichever of TLT or TIP has shown stronger recent momentum. During deflationary recessions where interest rates fall and bonds rally, TLT is selected — providing the traditional flight-to-quality protection. During inflationary episodes where nominal bonds decline alongside equities, TIP is selected — offering inflation-adjusted government backing that preserves purchasing power even when nominal rates are rising.
The offensive side remains identical to the base ADM: US large-cap stocks (SPY) compete against international small-cap stocks (SCZ) using a blended momentum score that averages one, three, and six-month returns. This accelerated composite detects trend changes faster than twelve-month lookbacks at the cost of higher turnover.
How It Works
Offensive Selection: Accelerated Momentum
The risk-on side operates identically to the base ADM strategy. Each month, SPY and SCZ are scored by averaging their trailing one-month, three-month, and six-month total returns. The asset with the higher composite score wins the relative comparison. If the winner's score is positive — indicating that its recent returns across all three timeframes are collectively above zero — the portfolio allocates 100% to that single equity asset.
The accelerated composite's sensitivity to recent price action means the strategy detects equity trend reversals within one to two months, substantially faster than GEM's twelve-month lookback. This faster detection reduces the depth of drawdowns during the entry phase of bear markets, which is the primary performance advantage of the ADM family over traditional twelve-month dual momentum.
Dual Defensive Selection
When the winning equity asset fails the absolute momentum test — both SPY and SCZ have negative composite scores — the portfolio shifts entirely to defensive positioning. Unlike the base ADM which defaults to TLT regardless of conditions, ADM-IP selects the defensive asset dynamically by comparing the one-month returns of long-term Treasuries (TLT) and inflation-protected bonds (TIP).
This one-month lookback for defensive selection is deliberately short — the goal is to rapidly identify which type of government bond is performing better in the current environment, not to predict which will lead over the coming year. During deflationary conditions, TLT typically shows positive recent returns due to falling yields and is selected. During inflationary tightening, TIP tends to outperform as its principal adjusts upward with CPI while TLT suffers from duration losses, and the strategy selects TIP instead.
Regime Adaptability
The dual defensive option transforms ADM from a strategy designed for one macroeconomic regime into one that adapts across regimes. The 2022 experience demonstrated why this matters: a strategy relying solely on nominal bonds for defense would have lost money on both the offensive exit and the defensive entry, compounding losses rather than hedging them. ADM-IP's ability to rotate into TIPS during inflationary periods materially reduces maximum drawdown compared to the base variant while preserving identical offensive behavior during equity bull markets.
The practical impact is most visible during the transition periods when the macroeconomic regime is shifting — such as the pivot from low-inflation growth to high-inflation tightening that occurred in 2021-2022. During these transitions, the one-month defensive selection rapidly adapts to the new regime, providing protection that matches the type of stress the markets are experiencing rather than applying a one-size-fits-all defensive allocation.
Explore Accelerating Dual Momentum — Inflation Protected (ADM-IP)
See the full backtest across 18 years of market data, or run your own what-if scenarios by adjusting all research parameters.