Stock Selection and Analysis

Using Momentum to Generate Alpha in Security Selection

The best and most popular white papers on the momentum factor

The momentum factor exploits one of the best-documented anomalies in academic literature - the tendency for securities that have performed well in the recent past to continue to do so in the period ahead.

Taking advantage of this anomaly in practice, however, is not straightforward. The papers below discuss the evidence for the momentum factor - for both equities and bonds - and examine how investors can build an investment process to generate alpha from it.

For equity markets, different researchers suggest different approaches. For instance, Robeco advocates capturing the spillover from credit momentum to equity momentum. Research Affiliates suggest using momentum in combination with a value factor. Geczy and Samonov suggest using a dynamically hedged momentum strategy to minimise the effect of trend reversals.

Savvy Investor

Looking for a better Momentum factor (Robeco, 2017)
This paper from Robeco discusses practical solutions to overcome the pitfalls of a momentum strategy. The paper focuses on the identification of securities which display "idiosyncratic", or stock-specific momentum, in order to overcome the problems of high turnover and return reversals.

Momentum: A Practitioner's Guide (S&P Dow Jones Indices, Jan 2017)
This primer from S&P discusses what momentum is, how it has performed, and how it can be taken advantage of.

Why Invest in Momentum as a Factor? (SSGA, 2017)
SSGA’s overview of momentum investing presents optimization as a technique for enhancing the diversification potential with other exposures like value and size, while also taming the higher turnover and the risk of episodic drawdowns that are inherent to this factor.

Two Centuries of Price-Return Momentum (Geczy and Samonov, 2016)
The authors use a monthly dataset of US stock prices from 1801-1926, and conduct out-of-sample testing of momentum strategies using post-1925 data. They suggest that momentum strategies can be optimised by employing them on a dynamically hedged basis, in order to minimise the losses associated with momentum reversals.

Fact, Fiction and Momentum Investing (Cliff Asness et al, AQR/JPM)
Cliff Asness and colleagues examine the "myths" associated with the use of momentum to generate alpha. Drawing on a selection of academic studies, the authors seek to establish the truth about the potential of trend-following strategies and to examine the real-life efficacy of using a momentum factor within the stock selection process.

Using momentum investing to enhance fixed income returns (IndexIQ, 2016)
Momentum is a long-established investment style in commodities, currencies, and equities. The authors of this paper ask whether fixed income investors should take a closer look at this approach too. They examine recent studies which suggest that the answer is 'yes'.

How to NOT Wipe Out when using a Momentum Strategy (Research Affiliates)
How can the momentum factor be harnessed most effectively? Chris Brightman of Research Affiliates argues that an index approach is not the best way to capture the momentum risk premium. Instead, he recommends using the momentum factor in conjunction with a value factor, in order to reduce reversal risk and imporve the risk/reward tradeoff.

Why should investors consider credit factors in fixed income (Invesco, 2017)
(This paper is not accessible in certain geographies) 
The paper dicsusses how factor investing differs between equity and fixed income, and the unique challenges to implementing fixed income factors in portfolios.

Smart credit investing: harvesting factor premiums (Robeco)
This paper argues that the use of corporate bond factors can add about 1% return a year in a strategic multi-asset portfolio. The Size, Low-Risk, Value and Momentum factors have high returns and Sharpe ratios in the corporate bond market. However, they may outperform or underperform the market for prolonged periods, resulting in drawdowns and high tracking errors. By combining factors in a multi-factor portfolio, the drawdowns and tracking errors become much smaller, while the high returns and Sharpe ratios are conserved.

Factor Investing in the Corporate Bond Market (Financial Analysts Journal, 2017)
This article was recently published in 2017 in the CFA Institute's Financial Analysts' Journal. It examines the performance of size, low-risk, value, and momentum factor portfolios in the corporate bond market.

Cliff Asness: "How Can a Strategy Still Work If Everyone Knows About It?" (2015)
If everyone knows about a market anomaly, can it still be exploited? Cliff Asness explains why he believe the answer can be "yes". He argues that the pursuit of selected, long-term anomalies will continue to generate alpha, although perhaps with an altered risk profile compared to pre-discovery.

iSTOXX Europe Factor Indices - Harvesting Equity Returns with Bond-Like Volatility (STOXX, 2017)
This paper describes the single and multi-factor indices developed by STOXX in collaboration with Alpha Centauri, to generate added value within a European equities, market neutral strategy. The iSTOXX Europe Market Neutral Single and Multi-Factor Indices enable investors to capture the risk premia associated with six risk factors: value, carry, size, momentum, quality and low vol.

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