- There is an important distinction between momentum and trending following. The former is a relative strategy (based on recent out or under performance) while the latter an absolute one (based on recent absolute performance).
- Every factor strategy has its down time. So is momentum. Momentum’s worst time occurs after a 2-year plus bear market followed by abrupt market upswing (e.g. 1Q 2009). But like other factor strategy, it works across VERY long periods of time and in many places. Combining value and momentum historically gave you positive annual return in 4 out of 5 times. Momentum adds diversification benefit to a value strategy (i.e. worth having momentum strategy even if its expected return is zero)
- Momentum is as strong in large stocks as in small stocks. There is indeed high turnover in momentum strategy (5-6 times of value). Hence it is much more appropriate to be exploited by a large institutional investor rather than by retail as the former enjoys 10 time less trading cost. However, momentum’s return does not seem to decline despite increased adaptation among hedge funds. Momentum’s premium should persist as long as behaviour bias (underreaction or delayed overreaction) or compensation for risk still exists.
- There are many ways to construct momentum signals, e.g. price momentum or fundamentals (e.g. earnings) momentum. Taking an average of all reasonable measures tend to yield better portfolios.