Two Centuries Of Momentum

Our 5 discussion introduction to final month's "Alice In Factorland: Can Momentum Investing Be Saved?—Arnott et al":

Possibly the final persistent factor.

With a huge hidden risk, come across the final link below.
From Flirting With Models:

A momentum-based investing approach tin sack last confusing to investors who are oft told that “chasing performance” is a massive fault together with “timing the market” is impossible.

Yet equally a systematized strategy, momentum sits upon most a quarter century of positive academic evidence and a century of successful empirical results.

Our firm, Newfound Research, was founded inward August 2008 to offering inquiry derived from our volatility-adjusted momentum models.  Today, nosotros furnish tactically risk-managed investment portfolios using those same models.

Momentum, together with especially time-series momentum, has been inward our deoxyribonucleic acid since 24-hour interval one.
In this Foundational Series piece, nosotros desire to explore momentum’s rich history together with the academic testify demonstrating its robustness across property classes, geographies, together with marketplace cycles.

1. What is momentum?

Momentum is a organization of investing that buys together with sells based upon recent returns.  Momentum investors purchase outperforming securities together with avoid – or sell brusque – underperforming ones.

The notion is closely tied to physics.  In physics, momentum is the production of the majority together with velocity of an object.  For example, a heavy truck moving at a high speed has large momentum.  To halt the truck, nosotros must apply either a large or a prolonged forcefulness against it.

Momentum investors apply a like notion.  They assume outperforming securities will drib dead on to outperform inward absence of significant headwinds.
2. The Two Faces & Many Names of Momentum

2.1 Relative Momentum

The phenomenon of relative momentum is also called cross-sectional momentum and relative strength.

Relative momentum investors compare securities against each other’s performance.  They favor buying outperforming securities together with avoiding – or short-selling – underperforming securities.
Long-only relative momentum investors rotate betwixt a subset of holdings inside their investable universe. For example, a unproblematic long-only relative strength organization illustration is “best north of.”

At rebalance, this organization sells its electrical current holdings together with buys the superlative north performing securities of a basket. In doing so, the strategy seeks to align the portfolio amongst the best performing securities inward hopes they drib dead on to outperform.

Momo Mamas Bored With Dollar, Chasing New Scam Dogs

I'm dating myself.
The headline is a conduct keep off on the championship of the twelvemonth 2000 book past times Wall Street Journalist John Emshwiller. To the academic:

Momentum As The Only Reliable Market Anomaly
Whoa! Has The Small-Cap Premium Disappeared? That Would Leave Only Momentum inward the Tried-and-True Anomaly File!
UPDATED--Cliff Asness' AQR Capital: H5N1 Century of Evidence on Trend-Following Investing; Since 1903
UPDATE--More on "A Century of Evidence on Trend-Following Investing"
AQR Capital's Cliff Asness on Market Efficiency
Attention All Mo-mo Mamas: The Huge Hidden Downside Risk inward Momentum Trading
Alpha Persistence & H5N1 Simple Momentum System For Beating the Market
The Last Word On Asness' Alpha, Buffet's Beta together with The Failure of Commodity Quants (and how to plough hyperlinks into footnotes)
Testing Small-batch Artisanal Portfolio Construction With Cliff Asness together with Grantham, Mayo's James Montier
AQR--"Demystifying Managed Futures" (Returns together with Anomalies)
Improving on the Four-factor (beta, size, value, momentum) Asset Pricing Model
"Two centuries of tendency following"
Because momentum is i of the really few equity marketplace anomalies that holds upward nether scrutiny, tendency next genuinely does work. And inward the illustration of futures, tendency next has larn the default quasi-mystical survival strategy for midlevel Commodity Trading Advisors.
(default, honey Brutus, is non inward our stars but inward ourselves, that nosotros are underlings)... 

The Giant Caveat:
Attention All Mo-Mo Mamas: The Huge Hidden Downside Risk inward Momentum Trading

Apparently when issues lose their momo mojo they lose it big.
From Marginal Evolution:

Momentum trading produces outsized losses, paper
Piling inward on the hot stock tin sack last all also exciting non merely because of the exuberance from outsized gains but also because of the hurting of outsized losses such trading strategy tin sack convey together with which i of these possibilities happens depends on when such trading strategy is employed, says the latest newspaper from a triplet of professors.

It has been good documented that toll momentum strategy – long seat inward past times winners together with an equal brusque seat inward past times loser – produces outsized gains but based on information from July 1927 to Dec 2010, authors Kent Daniel, Ravi Jagannathan together with Soohun Kim, respect that such strategy inflicts staggering losses suggesting that the strategy has a hidden bias inward it....