Momentum Investing

AgPa #47: Equity Factors without Shorting

When Equity Factors Drop Their Shorts (2020)
David Blitz, Guido Baltussen, Pim van Vliet
Financial Analysts Journal, 76(4), URL

This week’s AGNOSTIC Paper examines the important issue of performance contributions from the long and short legs of the major factor premiums. In English: can we profitably invest in factors without shorting a large number of stocks?

  • The long-legs of factors are more important than the short-legs
  • The same pattern holds in international markets

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AgPa #46: Transaction Costs and Capacities of Factor Strategies

Transaction Costs of Factor-Investing Strategies (2019)
Feifei Li, Tzee-Man Chow, Alex Pickard, Yadwinder Garg
Financial Analysts Journal 75(2), 47-61, URL

In this week’s AGNOSTIC paper, the authors develop a transaction cost model and use it to estimate the capacity of the major factors. There are many ways to define capacity in more detail, but the general idea is quite simple. It is the amount of money you can invest in a profitable strategy before you move prices too much and lose your advantage. Unfortunately, what theoretically sounds simple and intuitive is actually quite difficult to estimate in practice…

  • Implementation costs depend on tilt, turnover, and execution speed
  • Capacities of factors for a maximum cost of 0.5% per year
  • There is not yet a consensus on factor capacities

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AgPa #45: Factor Investing in Private Debt

Investing with Style in Liquid Private Debt (2022)
Thomas Mählmann, Galina Sukonnik
Financial Analysts Journal 78(3), URL

This week’s AGNOSTIC Paper is yet another out-of-sample test of the Momentum and Value factor. The authors apply the factors within the relatively new asset class of private debt. More specifically, for “[…] loans to non-investment grade issuers, commonly known as leveraged loans.” This is obviously not my main area of expertise, but I learned from the paper that there is quite some trading of such loans in private secondary markets. Implementing a factor strategy for leveraged loans is obviously more complicated than for equities, but this is exactly what makes this study so interesting.

  • Private debt improves multi-asset portfolios
  • Value and Momentum are profitable within private debt

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AgPa #42: Global Factors since 1800

Global factor premiums (2021)
Guido Baltussen, Laurens Swinkels, Pim van Vliet
Journal of Financial Economics 124(3), 1128-1154, URL

This week’s AGNOSTIC Paper is another out-of-sample test of the major factors and goes even further back in time than the last one. The authors examine the major factor premiums among equity indices, government bond indices, currencies, and commodities in a sample that ranges from December 31, 1799 to December 31, 2016.

  • Momentum, Value, and Low-Risk “worked” globally, in different asset classes, and out-of-sample
  • There is little evidence for factor decay

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AgPa #41: US Factors before 1926

The Cross-Section of Stock Returns before CRSP (2023)
Guido Baltussen, Bart van Vliet, Pim van Vliet
SSRN Working Paper, URL

This week’s AGNOSTIC Paper is an unprecedented out-of-sample test of the four major factors (Momentum, Value, Low-Risk, Size). The authors construct a novel dataset of US stocks that reaches from 1866 to 1926. It therefore extends the extensively studied CRSP dataset by 60 years.

  • Momentum, Value, and Low-Risk were there before 1926
  • Factors weren’t stronger before 1926
  • Machine learning models find the same factors

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SA #11: QMOM – Second-Best In The Momentum Crash of January 2023

QMOM: Second-Best In The Momentum Crash Of January 2023
February 06, 2023

Summary

  • January 2023 was brutal for momentum because many of last year’s losers suddenly outperformed – a momentum crash par excellence.
  • The Dow Jones US Market Neutral Momentum Index, a simple and transparent implementation of the long-short momentum factor, lost 19% YTD (as of February 3, 2023).
  • Most of the losses came from the short-side. The Dow Jones US Low Momentum Index, the portfolio of past losers, returned 25.68% YTD.
  • The Alpha Architect U.S. Quantitative Momentum ETF returned -0.83% YTD and underperformed the US market by >10% points. Although painful, this is still second-best in a peer-group of other momentum ETFs.
  • This speaks for the differentiated momentum process of Alpha Architect. Nobody likes bad months, but momentum crashes are actually a plausible reason why momentum worked historically and probably continues to do so in the future.


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SA #8: SPMO – Large Cap Momentum At Its Best

SPMO: Large Cap Momentum At Its Best
January 19, 2023

Summary

  • Momentum is the simple idea that stocks which performed relatively strong over the recent past (winners) tend to outperform those that performed poorly (losers).
  • The Invesco S&P 500 Momentum ETF invests in the 100 stocks with the highest “momentum score” (12-month return) from the S&P 500 Index.
  • Since inception in 2015, SPMO delivered momentum exposure with respect to the academic benchmark of Kenneth French. Since 2017, it also outperformed most momentum-peers.
  • SPMO especially outperformed MTUM, a similar large cap momentum ETF. However, most of this outperformance is unlikely systematic and probably comes from different rebalancing dates in 2022.
  • For investors who actively want large-cap momentum exposure, SPMO is a reasonable and cheap instrument. For those who want general momentum exposure, a fund with a larger universe is probably the better choice.


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AgPa #37: Momentum Investing – Fact and Fiction

Fact, Fiction, and Momentum Investing (2014)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Special 40th Anniversary Issue 2014, 40(5) 75-92, URL/AQR

After examining the general Facts and Fictions about factor investing, this week’s AGNOSTIC Paper examines momentum in more detail. Specifically, the authors combat 10 misleading myths about momentum…

  • Myth 1: Momentum returns are economically not meaningful
  • Myth 2: Long-only investors cannot capture momentum
  • Myth 3: Momentum is much stronger among small-caps
  • Myth 4: Momentum does not survive trading costs
  • Myth 5: Momentum produces a huge tax bill
  • Myth 6: Momentum is better as a screen than as a factor
  • Myth 7: Momentum returns should disappear in the future
  • Myth 8: Momentum is too volatile to rely on
  • Myth 9: Different momentum measures lead to different results
  • Myth 10: There is no theory behind momentum

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SA #4: QMOM – Best-In-Class Momentum, Now 20% Cheaper

QMOM: Best-In-Class Momentum, Now 20% Cheaper
December 30, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies and has produced significant outperformance in the past.
  • The Alpha Architect U.S. Quantitative Momentum ETF follows a differentiated investment process that delivered strong momentum exposure in the past.
  • Over the last 5 years, QMOM outperformed several other momentum exchange-traded funds and an academic benchmark from Kenneth French.
  • On December 1, 2022, Alpha Architect (the manager of QMOM) announced that they will lower the management fee from 0.49% to 0.39% per 01/31/2023.
  • This is a reduction of about 20% and makes the QMOM ETF even more attractive for investors who seek active momentum exposure.


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SA #3: MTUM – Momentum, But Somewhat Slow

MTUM: Momentum, But Somewhat Slow
December 28, 2022

Summary

  • Momentum is one of the best-researched systematic investing strategies, and has provided significant outperformance in the past.
  • The MTUM ETF tracks the MSCI USA Momentum SR Variant Index and is an easy way to add momentum to a portfolio.
  • The ETF follows a transparent methodology and has performed mostly in line with the academic momentum benchmark from Kenneth French since 2013.
  • The key problem of the methodology, however, is the slow, six-month rebalancing – also the reason why MTUM suffered in 2022.
  • For investors who don’t want to take too much active risk and/or monitor active managers, the MTUM ETF is still a reasonable momentum implementation.


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