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”
Size and value worked.
Momentum was working, then fell off a cliff.
Value got killed in the 2008 debalce
Momentum got killed in the post 2008 runup
Value/size did a fairly good job preserving capital relative to the SP 500
Market=Mediocre at best.
Value=Good to go.
Size=Good to go.
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.
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.
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