Research Affiliates: How NOT to Wipe Out with Momentum

Research Affiliates: How NOT to Wipe Out with Momentum

Key Points

1. Implementation costs and front running make an index replication strategy inadvisable as a means to capture the momentum premium.

2. The pros (proven profitability and robustness) of momentum can swiftly be wiped out by the cons (crashes and crowded trades), making an active implementation dangerous for all but the most skilled managers.

3. Combining value and momentum in order to exploit their typically negative correlation in stock holdings and alpha can improve a portfolio’s Sharpe ratio over those of either strategy alone.

Momentum investors are like the surfers we watch from beaches along the Pacific coast. Both must catch a wave. Both attempt to ride it as it breaks. But...