1. For the record, the opinions expressed in this piece of writing are the author’s; they do not necessarily reflect Research Affiliates’ views.
2. See, for example, Rouwenhorst (1998), Griffin, Ji, and Martin (2005), Rouwenhorst (1999), Moskowitz and Grinblatt (1999), Carhart (1997), and Asness, Moskowitz, and Pedersen (2009).
3. For a fee on the order of 2 + 20%, CTAs will gladly provide you with the momentum returns across assets.
4. Kahneman devotes a very readable chapter to anchoring in Kahneman (2011).
5. Soffer and Walther (2000); Chordia and Shivakumar (2002).
6. Beta, value, size, and momentum constitute the classic “four-factor” Fama–French–Carhart risk model.
7. The risk factor portfolios are courtesy of Ken French at Dartmouth. Risk factor returns are calculated for zero-cost long/short portfolios. Momentum is calculated by taking the returns of all stocks from 12 months ago to 2 months ago, ranking them and selecting the top returning 30% of stocks for the long portfolio and shorting the worst 30% performing stocks.
8. The authors estimated that, for a single fund, momentum loses its statistical significance at $1–2 billion, and its profits at $5 billion.
9. Of course, traditional momentum portfolios have alpha beyond the beta risk factor, but idiosyncratic momentum dampens volatility, resulting in a more attractive risk premium.
10. If the stock market is not perfectly efficient for any reason, half of stocks are overpriced and half are underpriced. As market participants seek fair value, prices mean revert resulting in a return that has been shown to be approximately 2% over the capitalization-weighted index in developed markets such as the United States (Arnott, Hsu, and Moore, 2005).
11. Vayanos and Woolley (2013) determined that the Sharpe ratio of the momentum strategy is a function of the length of the window over which past returns are calculated, and they found that the highest Sharpe ratio was achieved using a window of four months. This implies a rebalancing frequency of three times per year.
12. Beginning in 1993 through June 2013, an equal-weighted Russell 1000 Value Index and AQR Momentum Index returned 9.53% relative to an equal-weighted Russell 1000 Value Index and Russell 1000 Growth Index that returned 8.63%. They had similar standard deviations of 15.4% (Bryan, 2013).
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Asness, Clifford S., Tobias J. Moskowitz, and Lasse Heje Pedersen. 2010. “Value and Momentum Everywhere.” American Finance Association 2010 Atlanta Meetings Paper.
Bryan, Alex. 2013. “Does Momentum Investing Work?” Morningstar (April 10).
Carhart, Mark M. 1997. “On Persistence in Mutual Fund Performance.” Journal of Finance, vol. 52, no. 1 (March):57–82.
Chaves, Denis. 2012. “Eureka! A Momentum Strategy that Also Works in Japan.” Research Affiliates Working Paper (January 9).
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———.1999. “Local Return Factors and Turnover in Emerging Stock Markets.” Journal of Finance, vol. 54, no. 4 (August):1439–1464.
Soffer, Leonard C., and Beverly R. Walther. 2000. “Returns Momentum, Returns Reversals, and Earnings Surprises.” Working Paper (January).
Vayanos, Dimitri, and Paul Woolley. 2013. “An Institutional Theory of Momentum and Reversal.” Review of Financial Studies, vol. 26 no. 5 (May):1087–1145.