Momentum investing continues to be a key element of systematic equity strategies, as recent research emphasizes its importance for investors. A forthcoming study set for release in 2026 provides an in-depth analysis of momentum’s empirical foundations and practical evolution.
This research, drawing from over 150 years of data and various portfolio configurations, reaffirms the momentum premium as a consistent return spread that remains significant across different market conditions, geographies, and portfolio structures. The long-term persistence of this strategy is notable, with findings indicating that an initial investment of $1 could grow to more than $10,000 through a straightforward long-short momentum approach from 1866 to 2024, yielding annualized returns of about 8-9%.
However, while institutional investors are validated in momentum’s robustness, they face challenges due to the evolving implementation and risk profiles. The study highlights that momentum cannot be viewed as a monolithic strategy; its effectiveness is significantly influenced by design choices, including weighting methods and sensitivity to different market factors.
Recent advancements have broadened the definition of momentum beyond simple price trends. The inclusion of alternative momentum forms—such as fundamental and behavioral momentum—has shown potential for improved returns and reduced risks. The research suggests that a multidimensional approach, which integrates multiple signals, enhances risk-adjusted performance compared to traditional price momentum.
Despite its advantages, momentum strategies face inherent risks, particularly during market shifts, which can lead to substantial drawdowns. Utilizing strategies like volatility scaling can mitigate these risks and enhance returns.
Ultimately, embracing multidimensional, risk-managed momentum strategies may be crucial for investors aiming to achieve sustainable alpha while navigating market uncertainties.
Why this story matters
- Understanding momentum investing can inform strategic asset allocation and risk management for institutional investors.
Key takeaway
- Momentum investing is resilient but requires careful portfolio design and risk management.
Opposing viewpoint
- Critics argue that momentum strategies may expose investors to heightened risk during market volatility.
