Can Momentum Investing Be Saved?

Research Affiliates

Rob Arnott

Research

20 Pages

Research Affiliates examines why momentum investing has looked exceptional in backtests yet disappointed in live portfolios. The paper argues trading costs, overcrowding, and “stale momentum” stocks have eroded returns, noting momentum funds lagged markets by as much as 4.3% annually despite decades of academic enthusiasm.

Key Takeaways

Momentum Reality Check: Six US momentum funds underperformed the market by 2.2% annually on average with four factor alpha trailing by 3.1% despite strong paper results.
Trading Costs Matter: At $10 billion AUM estimated momentum trading costs reached 6.1% annually roughly 6 times value strategies and 12 times small cap strategies.
Fresh Momentum Works: Fresh momentum peaked near 7% cumulative gains by month 11 and still retained almost 4% by month 36 outperforming stale momentum after 2000 and 2008 crashes.
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