Momentum investing has long stood as a fundamental element within systematic equity strategies. Recent investigations reveal that this approach commands significant attention from investors, particularly as we look ahead to future market conditions. Our extensive study—set for publication in 2026—offers an in-depth examination of the empirical evidence supporting momentum and its practical adaptations over time.
By analyzing over a century’s worth of financial data and countless portfolio configurations, we have reinforced the notion that momentum is not merely a transient trend but a reliable source of returns.
The momentum premium, a term that refers to the extra returns earned by investing in assets that have performed well in the past, has proven to be consistent across various time periods and market environments.
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The enduring nature of momentum
One of the most striking characteristics of momentum investing is its long-lasting presence in financial markets. As shown in our findings, the performance of a straightforward long-short momentum strategy—where investors purchase past winners and short-sell past losers—has transformed an initial investment of $1 into over $10,000 from 1866 to. This impressive achievement reflects annualized returns hovering around 8-9%, showcasing not only substantial gains but also their statistical significance, easily surpassing commonly accepted thresholds for validity.
Consistency across various methodologies
Notably, these findings hold true irrespective of how portfolios are structured. Whether employing value-weighted or equal-weighted returns, modifying the definition of momentum, or changing the timeframe of analysis, the momentum premium remains intact. This level of resilience across different methodologies lends credence to the idea that momentum is a fundamental aspect of financial markets rather than a fleeting occurrence.
Complexity in momentum strategy design
It is crucial to understand that momentum investing is not a monolithic strategy; its performance can vary significantly based on the construction of the portfolio. Factors such as the choice between value-weighted and equal-weighted returns, the selection of breakpoints, and the inclusion of microcap stocks can all influence both the returns generated and the risk profile of the investment.
To illustrate this point, we have created over 4,000 variations of momentum portfolios, all of which yield positive Sharpe ratios. This indicates that the momentum premium is indeed robust. However, the range of performance is noteworthy: while the median Sharpe ratio is 0.61, individual strategies can range from 0.38 to 0.94. This disparity highlights the critical importance of careful specification checks and transparency in factor design, especially in relation to benchmarking and reporting.
Diverse dimensions of momentum
The landscape of momentum research has expanded significantly in recent years, moving beyond simple price trends. New methodologies seek to capture the continued performance of returns through different avenues. For instance, fundamental momentum assesses factors such as earnings surprises and analyst revisions, which reflect investors’ tendencies to underreact to new information. Residual momentum, on the other hand, focuses on specific return patterns related to individual firms, usually resulting in smoother and more favorable performance metrics.
Other approaches, like anchor-based momentum, utilize metrics such as a stock’s distance from its 52-week high, capitalizing on behavioral biases. Additionally, industry and network momentum tap into both macroeconomic trends and micro-level relationships, while factor momentum reveals how slow-moving capital flows into certain investment styles can impact returns.
Managing risks in momentum investing
Despite its many advantages, momentum investing is not without its challenges, particularly regarding crash risk. Strategies based on momentum can experience sharp reversals, especially during significant market changes. Our research indicates that traditional price momentum strategies can suffer maximum drawdowns as severe as -88%, often accompanied by skewed and fat-tailed return distributions.
However, alternative momentum signals tend to exhibit lower volatility. By incorporating a multidimensional approach that combines various momentum signals, investors can effectively reduce risk compared to traditional methods. We also emphasize the importance of implementing volatility scaling at both the portfolio and individual stock levels, which can significantly mitigate drawdowns and enhance Sharpe ratios. As a result, our risk-managed momentum strategy achieves annualized returns nearing 18%, while maintaining volatility levels similar to standard momentum investments.
For institutional investors, the implications are clear: the way factors are constructed is crucial, and rigorous checks across portfolio designs are essential. Diversifying momentum strategies can lead to superior risk-adjusted returns, allowing investors to navigate inherent risks more effectively. We believe that momentum is an enduring characteristic of financial markets, but its application must adapt to changing conditions. Investors who adopt multidimensional and risk-managed momentum strategies will be well-positioned to harness ongoing opportunities for alpha generation.
