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Across several time frames and equity markets, momentum trading strategies that involve buying past winners and selling past losers have produced considerable gains. In recent years, asset management firms have offered investment vehicles that provide investors with easy access to momentum strategies. The number of funds and the asset under management (AUM) of these firms has risen dramatically over the last decade.
Reference [1] examined the performance of these momentum funds and came to a surprising conclusion,
The asset management industry has grown rapidly over the past 20 years, with a significant shift from active to passive investment strategies, and from mutual funds to ETFs. Factor investing – investing in broad and persistent drivers of returns – has grown even faster than the industry as a whole. This paper looks at one specific strategy, momentum, and investigates the risk-adjusted returns and factor exposures of momentum funds. Using a comprehensive dataset of US equity funds, we find that the performance of momentum funds is only marginally explained by exposure to the MOM factor, and provide only little diversification benefits to investors who already invest in Fama-French factors. Furthermore, over the recent years, MOM gains have been largely driven by the factor’s short portfolio, raising further questions on the economic value of MOM strategies for long-only investors such as mutual funds. Taken together, our findings suggest that investors should look beyond the fund’s name or declared investment style and examine the fund’s risk-adjusted returns and factor exposures when engaging in momentum investing.
In short, the authors found that risk-adjusted returns of momentum funds are, on average, negative, and most of the time-series variation of the returns can be explained by exposure to the market factors. Therefore, before allocating AUM, investors should look beyond the fund’s name and examine the fund’s risk-adjusted returns carefully.
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References
[1] Banegas, Ayelen and Rosa, Carlo, A Look Under the Hood of Momentum Funds. 2022, http://dx.doi.org/10.2139/ssrn.4025868
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