Momentum investing has long been a foundational element within systematic equity strategies, captivating the attention of institutional allocators. Recent studies reveal that this approach is not just a passing trend but rather a vital aspect worthy of thorough examination. Our comprehensive review, set for publication in 2026, dives into the empirical roots and practical advancements of momentum investing.
Utilizing over a century and a half of data alongside numerous portfolio variations, we reaffirm the durability of momentum investing while also illustrating its evolution into a complex phenomenon. The momentum premium does not merely result from statistical anomalies or data mining; it signifies a substantial return gap that has consistently prevailed across different time periods, locations, and portfolio configurations.
The enduring nature of momentum investing
One of the most striking characteristics of momentum investing is its long-term persistence, which underpins its relevance in the investment community. Historical data from 1866 to shows that a basic long-short momentum strategy—purchasing stocks that have recently performed well while shorting those that have underperformed—can turn an initial investment of $1 into over $10,000. This translates to annualized returns hovering around 8% to 9%, showcasing not only significant gains but also robust statistical significance.
Such compelling results remain consistent irrespective of the method employed to construct the portfolios. Whether one opts for value-weighted or equal-weighted returns, adjusts the definitions of momentum, or changes the examined time frame, the momentum premium endures. This consistency across various methodologies strengthens the assertion that momentum investing reflects an intrinsic aspect of financial markets rather than a transient phenomenon.
Implications for institutional investors
For institutional investors, the implications are clear: momentum has shown resilience across diverse eras and market environments. This suggests that momentum investing is a fundamental characteristic of the financial landscape, rather than a fleeting opportunity. However, it is crucial to recognize that momentum is not a monolithic strategy; its performance can significantly vary based on how portfolios are structured.
Factors such as whether returns are calculated using value or equal weighting, the establishment of breakpoints, and the inclusion of microcap stocks can all influence the returns and associated risks. To better understand this sensitivity, we generated over 4,000 variations of momentum portfolios. Each of these portfolios yielded positive Sharpe ratios, indicating the robustness of the momentum premium. However, there was a notable performance range, with median Sharpe ratios at 0.61, and variations stretching from 0.38 to 0.94. This underscores the importance of meticulous specification checks and transparency in factor design, especially when benchmarking results.
Expanding the scope of momentum strategies
In recent years, the exploration of momentum has expanded beyond mere price trends. New methodologies have emerged, capturing various dimensions of return persistence. Fundamental momentum, for instance, is based on earnings surprises and analyst revisions, revealing investors’ tendency to react insufficiently to new information. Conversely, residual momentum isolates company-specific return patterns and tends to produce smoother returns.
Moreover, anchor-based momentum, which examines the distance to a stock’s 52-week high, leverages behavioral biases that hinder selling at a loss. Additionally, industry and network momentum consider overarching trends and relationships that affect stocks, while factor momentum reflects slow-moving capital flows towards certain styles. These alternative signals provide valuable diversification opportunities, as they are not perfectly correlated with traditional price momentum.
Creating a multidimensional momentum approach
Combining these various signals into a multidimensional composite—where price momentum is equally weighted alongside ten alternative signals—has demonstrated superior average returns and significantly enhanced risk-adjusted performance. This composite has shown to outperform traditional price momentum strategies, highlighting the advantages of diversification.
Despite its strengths, the inherent risk of momentum strategies, particularly the potential for sharp reversals during market shifts, remains a concern. Historical data reveals maximum drawdowns for classic price momentum strategies can reach as high as –88%, emphasizing the need for careful risk management. Fortunately, many alternative signals exhibit lower volatility, and utilizing a multidimensional approach significantly mitigates risk.
Implementing volatility-adjusted strategies at both the portfolio and stock levels can lead to substantial improvements in Sharpe ratios while reducing drawdowns. Through these adaptations, a risk-managed momentum strategy has been shown to yield annualized returns nearing 18%, with drawdowns cut nearly in half.
In conclusion, momentum investing remains a critical and enduring aspect of financial markets. However, as the landscape evolves, so too must the approaches employed by investors. By adopting multidimensional, risk-adjusted momentum strategies, institutional investors can better navigate the complexities of the market while capturing persistent alpha.