Looking For Momentum? Banking Concern Lucifer Exterior The Us

Momentum vs. mean-reversion has been a perennial subject inward investing, non to the lowest degree quantitative investing. My disceptation has ever been that momentum strategies are by together with large less reliable than mean-reversal strategies. (See here or here.) My reader Mr. J. Rigg told me virtually a recent article inward the Financial Times suggesting that momentum strategies are hold out together with well, according to the research yesteryear Prof. Elroy Dimson et al at the London Business School. The strategy is really simple: purchase the stocks amongst the highest returns in, say, the terminal 12 months, brusk the ones amongst the lowest returns, together with concur for, say, 1 month. If y'all run this strategy for the summit 100 Great Britain stocks from 1900 to 2007, the average annualized homecoming earlier costs is virtually 10%.

There are, however, a publish of caveats worth noting inward this study:

First, it is really transaction-costly to implement momentum strategies for small-scale or fifty-fifty mid-cap stocks. If y'all element inward costs, 10% tin easily move 5% -- non an impressive publish fifty-fifty for a dollar-neutral strategy. (Though i should complaint that the infrequent rebalancing renders transaction costs consideration less important.)

Second, the drawdown durations are quite lengthy -- sometimes exceeding two years. This is non acceptable functioning for many hedge funds. Such lengthy drawdowns induce got been a mutual characteristic of many momentum strategies that I induce got personally studied together with traded.

Third, together with most interestingly, inward the menstruum 2001-2007, this momentum strategy has stopped working altogether for the U.S.A. market, acre continuing to deliver positive returns inward other markets!

What may hold out the argue for this dichotomy betwixt U.S.A. together with international markets? Momentum strategies by together with large derive their ability from the dull diffusion together with analysis of information: if all investors are simultaneously aware of all the relevant fiscal data virtually a companionship together with tin analyze the significance of the data instantaneously, they volition induce got come upwards to a consensus fair marketplace position value instantaneously together with no momentum inward the cost volition result. Hence mayhap the disappearance of momentum inward the U.S.A. equity marketplace position way what most people know already: that it is the most efficient equity marketplace position of all.