How NOT to Wipe Out with Momentum

Research Affiliates

Chris Brightman, Vitali Kalesnik

Research

6 Pages

Research Affiliates examines momentum investing, why its historical success can be difficult to capture in practice, and how implementation risks can undermine results. The paper argues that momentum’s appeal is real, yet crashes, crowding, and trading costs may matter more than many investors expect.

Key Takeaways

Momentum Crashes Matter: Momentum suffered a 74% drawdown after the Great Depression, a 31% drawdown after the tech bubble, and a 57% drawdown following the 2008 financial crisis.
Trading Costs Dominate: For a $10B large cap portfolio, average value added fell from 1.6% before costs to negative 4.9% after costs, highlighting implementation challenges.
Value Momentum Combination: In the U.S., value and momentum showed a negative 0.40 correlation, while a 50/50 mix achieved a 0.78 Sharpe ratio versus 0.41 for momentum alone.
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