Momentum Finished?

Momentum Finished?

November 2, 2011 Brainwave
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CXO Advisory highlights an interesting paper with the tagline: “Momentum Not Working?”

Here’s the link:

http://www.cxoadvisory.com/subscription-options/?wlfrom=%2F17440%2Fmomentum-investing%2Fmomentum-not-working%2F

Here is the link to the source:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1951137

This work inspired me to run the Size, Value, and Momentum factors through our systems and see what has happened over the past few years.

  • All returns are from Ken French’s website.
  • MOM=L/S Momentum=”Momentum factor”
  • SMB=L/S Size=”Size Factor”
  • HML=L/S Value=”Value Factor”
  • 1/1/2001–12/31/2010

Returns:

  • Size and value worked.
  • Momentum was working, then fell off a cliff.
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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Market Cycles:

  • Value got killed in the 2008 debalce
  • Momentum got killed in the post 2008 runup
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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Drawdowns:

  • Momentum: UUUUGGGLLLLYYY!
  • Value/size did a fairly good job preserving capital relative to the SP 500
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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Risk/Reward:

  • Market=Mediocre at best.
  • Value=Good to go.
  • Size=Good to go.
  • Momentum=Terrible.
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The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Conclusions:

Momentum returns are a lot like Bill Miller’s returns: they were on an epic winning streak, but gave almost all the gains back in a short period of time. My hunch is that momentum can still add alpha over the long haul, but the trick is finding a way to capture the alpha, without dying in the short-term. All the short-term volatility is likely due to the fact that momentum is a very crowded trade among quants–every pitchbook I’ve seen from a quant involves some form of momentum.

 

 

 

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Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.