Improving the Momentum Factor

Can Momentum Be Fixed?

May 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • The performance of the Momentum factor in the US has been poor since 2000
  • Fundamental valuation spreads were ineffective for improving the performance
  • Combinations with other factors and factor volatility filters would have yielded better results


John H. Cochrane of the Hoover Institution at Stanford University described the ever-growing number of factors in the investment industry as the factor zoo in 2011. Taking the statement literally and assigning animals to factors is actually quite challenging. Value represents cheap stocks, but which animal is cheap?

The one factor that is likely the easiest to associate with an animal is Momentum as it is essentially represented by the chameleon. The Momentum factor buys winning and sells losing stocks, irrespective of what is driving the performance of these stocks. Like a chameleon that constantly changes its color to those of its environment, the factor portfolio adapts to the market. An alternative, perhaps less colorful perspective would be to consider Momentum as a meta-factor that mirrors the characteristics of Value, Low Volatility, or whatever factor is performing best at any given time.

Although these characteristics make Momentum attractive, the factor’s performance in the US stock market has been poor over the last two decades. The negative returns are partially explained by a severe factor-specific crash in 2009. In this short research note, we will investigate how to improve the performance of the Momentum factor in the US, or stated differently, make the chameleon great again (read Momentum Variations).


We focus on the Momentum factor in the US stock market, which is defined as buying the winning and shorting the losing stocks. The long-short, beta-neutral portfolio is created by selecting the top and bottom 10% of stocks in the US stock market ranked by their 12-month performance, excluding the last month. Only stocks with a minimum market capitalization of $1 billion are included. Portfolios are rebalanced monthly and each transaction incurs costs of 10 basis points.