Performance of Momentum Funds

Subscribe to newsletter

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.

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

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.

What do you think? Let us know in the comments below.

References

[1] Banegas, Ayelen and Rosa, Carlo, A Look Under the Hood of Momentum Funds. 2022, http://dx.doi.org/10.2139/ssrn.4025868

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSCirium Enhances Industry-Leading On-Time Performance Advisory Board with Three Esteemed Aviation Leaders
Cirium Enhances Industry-Leading On-Time Performance Advisory Board with Three Esteemed Aviation Leaders

LONDON — Cirium, the world’s most trusted source of aviation analytics, has appointed three prominent aviation experts to its Airline and Airport On-Time Performance Advisory Board. The move underscores Cirium’s commitment to maintaining its position as the global gold standard for airline and airport performance…

Stay up-to-date with the latest news - click here
LATEST NEWSBiden visits Angolan port city of Lobito to tout railway plans
Biden visits Angolan port city of Lobito to tout railway plans
Stay up-to-date with the latest news - click here
LATEST NEWSExclusive-Northvolt seeks to sell electric industrial battery business by year-end
Exclusive-Northvolt seeks to sell electric industrial battery business by year-end
Stay up-to-date with the latest news - click here
LATEST NEWSVolkswagen recalling 4,616 vehicles in US over battery overheating concerns
Volkswagen recalling 4,616 vehicles in US over battery overheating concerns
Stay up-to-date with the latest news - click here
LATEST NEWSSnowline Gold Intersects 386.0 m of 1.1 Grams per Tonne Gold From Surface Including 120.5 m of 2.0 Grams per Tonne Gold With Additional Strong Intersections Near Edges of Valley Resource
Snowline Gold Intersects 386.0 m of 1.1 Grams per Tonne Gold From Surface Including 120.5 m of 2.0 Grams per Tonne Gold With Additional Strong Intersections Near Edges of Valley Resource
Stay up-to-date with the latest news - click here

Leave a Reply