Momentum Has Not Been ‘Overgrazed': A Visual Overview in 10 Slides
Claude B. Erb | May 10, 2014
The return to “momentum” does not seem to be the victim of “overgrazing”. Conceptually, overgrazing occurs when too much capital chases too few investment opportunities which in turn leads to low returns. The “equity risk premium”, the “size premium” and the “value premium” seem to be getting close to a no-man’s land of return-free risk. A high degree of belief in “the kindness of strangers” could be driving the low equity risk premium, size premium and value premium. A high degree of disbelief in momentum could be driving what appears to be a trend large cap momentum excess return of about 7%.
Fact, Fiction and Momentum Investing
Clifford S. Asness (AQR Capital), et al. | May 9, 2014
It’s been over 20 years since the academic discovery of momentum investing (Jegadeesh and Titman (1993), Asness (1994)), yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases “confusion and debate” is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum — but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data.
When Growth Beats Value: Removing Tail Risk From Global Equity Momentum Strategies
Andrew Clare (City University London), et al. | May 14, 2014
We investigate the relationship between value, growth and momentum investment styles across a wide range of developed and emerging economy equity markets. As would be anticipated, value investing generally beats growth. We then determine whether the application of relative momentum or trend following filters can enhance the risk-adjusted performance for either value or growth investors. We find that both value and growth portfolios benefit from momentum filters but particularly the latter, though the application of such a filter still leaves investors with return volatility that is typical of equity markets along with negative skewness and with high maximum drawdowns. However, our results show that the use of a simple trend following filter typically delivers a much more favourable investment performance than relative momentum with considerably lower volatility and smaller drawdowns. Furthermore, the application of a simple trend following filter either on its own or in combination with a relative momentum filter, not only reduces the performance advantage of value over growth investing but actually reverses this advantage.
Risk Adjusted Time Series Momentum
Martin Dudler (Quantica Capital), et al. | June 22, 2014
We introduce a new class of momentum strategies that are based on the long-term averages of risk-adjusted returns and test these strategies on a universe of 64 liquid futures contracts. We show that this risk adjusted momentum strategy outperforms the time series momentum strategy of Ooi, Moskowitz and Pedersen (2012) for almost all combinations of holding- and look-back periods. We construct measures of momentum-specific volatility (risk), (both within and across asset classes) and show that these volatility measures can be used both for risk management and it momentum timing. We find that momentum risk management significantly increases Sharpe ratios, but at the same time leads to more pronounced negative skewness and tail risk; by contrast, combining risk management with momentum timing practically eliminates the negative skewness of momentum returns and significantly reduces tail risk. In addition, momentum risk management leads to a much lower exposure to market, value, and momentum factors. As a result, risk-managed momentum returns offer much higher diversification benefits than the standard momentum returns.
The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation
Andrew Clare (City University London), et al. | February 3, 2014
We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate.The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.