Risk versus Momentum-based Equity Allocations
Which strategy prevails?
July 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Risk & momentum-based equity allocation strategies outperformed over the last 38 years
- However, the outperformance diminished over a shorter lookback
- Financial research is highly sensitive to assumptions like the lookback period
INTRODUCTION
A leading hedge fund manager recently released research promoting risk-based equity allocations as a way to reduce exposure to overpriced U.S. stocks. The study found that risk-weighting allocations across global markets outperformed the MSCI ACWI and even kept pace with the S&P 500 -while delivering a higher Sharpe ratio. Sounds great, right?
Not so fast. The analysis begins in 2000, during the aftermath of the tech bubble, a period when U.S. stocks – heavily weighted toward tech – underperformed other markets. In financial research, the starting point can heavily influence outcomes, and shifting it by just a few months can lead to very different conclusions.
In this article, we’ll examine risk-based equity allocation strategies and compare them to alternative approaches.
RISK-BASED VS MOMENTUM-BASED EQUITY STRATEGIES
We use stock market data from AQR covering 21 primarily developed countries and three regions – Europe, Asia Pacific, and North America. From this, we construct three types of indices for each group: equal-weighted (“EW”) indices, risk-based indices using rolling 12-month volatility, and momentum-based indices based on whether the 12-month rolling return is positive. We show the global market capitalization-weighted (“MW”) portfolio as the standard benchmark index.
Analyzing performance from 1987 to 2025, the momentum-based strategy across the 21 countries delivered the highest returns, followed by the risk-based and then the equal-weighted strategies. There was little differentiation between the remaining indices.
