1/ Can Momentum Investing Be Saved? (Arnott, Kalesnik, Kose, Wu)

"Live results for mutual funds that take on a momentum factor loading are surprisingly weak. But momentum can probably be saved, even net of fees and trading costs."

2/ "A momentum strategy is very vulnerable to crashes that tend to occur when the momentum trade is relatively expensive and in periods of heightened volatility. Its performance has also shown dismayingly high global correlation—especially during the crashes—since about 1999."
3/ "Momentum dominates everywhere except Japan. Since being documented in US stocks, the effect has also been documented in many other asset classes. So on paper, momentum looks fantastic!

"Sadly, live results net of trading costs hint at trouble for momentum investors."
4/ "Performance is skewed downward by the poor results of the single earnings momentum fund. But the other five hardly show exemplary results, even though the factor itself delivered a return of nearly 5.0%/year since 1990 and over 3.0%/year since the 2009 momentum crash."
5/ "Mutual fund data show that investors are able to benefit (a little) from the value effect, net of all fees and trading costs.

"The same data show that investors are not able to benefit from momentum, even during a quarter-century with robust paper momentum performance."
6/ Trading costs are very high for the default definition of momentum (6.1%/year vs. 0.5% for size and 1.0% for value). This seems to come from the strategy's turnover and the concentration of its turnover (among a small group of stocks and also in time series).
7/ "Momentum has a half-life of barely three months. Value overcomes momentum, on average, in less than a year (and overwhelms its cumulative gain in less than two years).

"For momentum—perhaps uniquely among all major
factors—the sell discipline is extraordinarily important."
8/ One way to address this problem is to use momentum to delay trades for a strategy with lower turnover (for example, value). The authors use a back-of-envelope calculation to estimate a 1.2% performance boost for value with no increase in costs.


9/ Fresh momentum outperforms stale momentum without requiring a shorter holding period.

Stale momentum = top quintile of momentum over the past year AND the year before that
Fresh momentum = top quintile of momentum over the past year AND bottom quintile the year before that
10/ When all forms of momentum are rebalanced monthly, fresh momentum outperforms with less vulnerability to momentum crashes.

One interpretation is that fresh momentum avoids buying overly expensive winners and avoids shorting overly cheap losers, so it's value + momentum.
11/ Related research:

Fact, Fiction and Momentum Investing

Value and Momentum Everywhere

Implementing Momentum: What Have We Learned?

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More from @ReformedTrader

6 Apr
New SSRN papers: April 2021
(I haven't read these, but the abstracts look interesting.)

Volmageddon & the Failure of Short Volatility Products

Understanding the Performance of the Equity Value Factor

Power Grab: Activists, Short Sellers, and Disagreement

Credibility of managers’ fair value assessments: evidence from smaller-than-expected goodwill impairments
Qualitative Accounting Research in the Time of COVID-19 - Changes, Challenges and Opportunities

How Does Information Asymmetry Affect REIT Investments? Cost of Capital, Performance, and Executive Compensation
Read 6 tweets
5 Apr
1/ Best Strategies for Inflationary Times (Neville, Draaisma, Funnell, Harvey, Hemert)

"Unexpected inflation is bad for bonds and equities, with local inflation mattering most, while commodities and futures trend following performance is strong."

2/ Inflationary regimes are when:
* YOY CPI ≥ 5% and is above 50% of its highest level over the past 24 months, OR
* YOY CPI ≥ 2%, is below 50% of its highest level over the past 24 months, then re-accelerates to ≥ 5%
* Episode length ≥ 6 months

Reported returns are CAGRs.
3/ Bonds & equities (commodities, trend following) perform poorly (well) during inflationary regimes.

For companies, costs may tend to rise faster than output prices.

NOTE: Strong trend performance may be partly from the way inflation regimes are defined (length ≥ 6 months).
Read 20 tweets
1 Apr
1/ Value Return Predictability Across Asset Classes and Commonalities in Risk Premia (Yara, Boons, Tamoni)

"Returns to value in equities, industries, commodities, currencies, bonds, and stock indexes are predictable by their respective value spreads."

papers.ssrn.com/sol3/papers.cf… Image
2/ Value measures:

B/M (market values updated monthly; financials and small stocks excluded)

Industry-adjusted B/M

Negative of five-year spot return (commodities, bonds)
Five-year change in ten-year yield (bonds)

Five-year change in relative PPP (currencies) ImageImage
3/ "Value spreads in stocks, industries, commodities and equity indexes correlate strongly and positively with each other.

"The first PC explains 51% of total variation. The correlation between a simple across-asset-class average of the value spreads and the first PC is 0.95." ImageImageImageImage
Read 17 tweets
1 Apr
1/ The Man Who Knew: The Life and Times of Alan Greenspan (Sebastian Mallaby)

"He was a conservative who could advocate tax hikes, a libertarian who repeatedly supported bailouts, an economist who often behaved more like a Washington tactician." (p. 6)

amazon.com/Man-Who-Knew-T… Image
2/ "Much of the post-crisis commentary has reduced Greenspan to a caricature. He is accused of believing blindly in models. He was, in fact, a leading skeptic of them. He is blamed for underestimating the propensity of financial systems to run wild.
3/ "He had, in fact, spent fifty years warning of treacherous credit cycles.

"A man who embraces the gold standard and then presides over the financial printing press is surely no simple ideologue." (p. 6)
Read 113 tweets
31 Mar
1/ The Closed-End Funds Puzzle: A Survey Review (Charrón)

"So far, none of the possible explanations from either traditional finance or behavioral finance has been able to fully account for the occurrence of the CEF puzzle."

2/ "Discounts are subject to wide variations over time and across funds. The fluctuations appear to be mean-reverting and highly correlated. When merger, liquidation, or conversion to open-end fund terminates a closed-end fund, prices tend to converge to reported NAVs."
3/ "Malkiel finds a positive relationship between discounts and unrealized appreciation and restricted stocks. Funds with higher liquidity, have higher premiums or lower discounts.

"On the other hand, Lee et al. showed that restricted holdings could not explain the discount."
Read 12 tweets
26 Mar
We agree that some textbook experiments in biology don't replicate. Did you know that CAPM doesn't replicate, either?

CAPM doesn't replicate, but did you know that some textbook experiments in bio also don't replicate?

Read 6 tweets

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