Fact, Fiction and Momentum Investing

September 23, 2014

The Journal of Portfolio Management

Momentum is the phenomenon that securities which have performed well relative to peers (winners) on average continue to outperform, and securities that have performed relatively poorly (losers) tend to continue to underperform.

The existence of momentum is a well-established empirical fact. The return premium is evident in 212 years of U.S. equity data (from 1801 to 2012) — as well as U.K. equity data dating back to the Victorian age in over 20 years of out-of-sample evidence from its original discovery, in 40 other countries and in more than a dozen other asset classes. Some of this evidence predates academic research in financial economics, suggesting that the momentum premium has been a part of markets for as long as there have been markets.

However, as momentum strategies have grown in popularity, so have myths around them. Some of the most common myths are that momentum is too “small and sporadic” a factor, works mostly on the short side, works well only among small stocks and doesn't survive trading costs. Furthermore, some argue that momentum is best used as a "screen," not as a regular factor in an investment process. Others will go so far as to say that momentum investing is like a game of “hot potato,” implying that it isn't a serious investment strategy, with no theory or reasonable explanation to back it up.

In this essay we address and refute these myths using both widely circulated academic papers and data from Kenneth French's publicly available website, a standard dataset used by both academics and practitioners.

  • AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

  • The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.

    This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.