Fact, Fiction, And Momentum Investing - AQR Capital
Volume 2 32www.practicalapplications.comFact, Fiction,and MomentumInvestingCLIFFORD ASNESS, ANDREA FRAZZINI,RONEN ISRAEL, and TOBIAS MOSKOWITZThe Voices of Influence iijournals.com
Practical Applications ofFact, Fiction, andMomentum InvestingAuthors: Clifford Asness, Andrea Frazzini, Ronen Israel and Tobias MoskowitzSource: The Journal of Portfolio Management 40th Anniversary Issue, Vol. 40, No. 5.Report Written By: Gauri GoyalKeywords: Momentum Investing, AQR Capital Management, University of ChicagoOverviewMomentum works in the long term, particularly when combined with other negativelycorrelated strategies, such as value. In this report, the authors of Fact, Fiction,and Momentum Investing, from The Journal of Portfolio Management’s 40thAnniversary Issue, dispel some of the common misconceptions about momentuminvesting. Read on for practical insights into how to best approach momentuminvesting.Practical Applications The momentum premium persists. It exists for over 200 years of US stockmarket data and in over 40 countries. Combine momentum with value. Combining momentum investing withnegatively correlated strategies such as value investing can produce some of thehighest risk-adjusted returns over time. Diversify to hedge it in a downturn. Momentum alone can suffer at rare times, soinvestors can hedge by combining it with value exposure.Practical Applications ReportThough momentum investing has been around for a long time, it has endured anumber of widely held misconceptions. Some common errors are that it works mainlyon the short side, that its returns are small and sporadic, that it is limited to smallcap securities, and that its trading costs are too high. But investors need to study theacademic literature, apply publicly available empirical data and connect the dots: Themomentum premium persists.This article, by longtime proponents of momentum and value investing, gets its armsaround the academic research and highlights the positive performance of momentuminvesting in the US and other markets, and even in other asset classes. Showingthat the momentum premium can be observed over 200 years of data, for dozens offinancial markets and for different asset classes, the authors bust the 10 most commonmyths about momentum investing.1 // Practical ApplicationsClifford Asnesscliff.asness@aqr.comCliff is a Founder, Managing Principal andChief Investment Officer at AQR CapitalManagement in Greenwich, Connecticut.He is an active researcher and has authoredarticles on a variety of financial topics formany publications, including The Journal ofPortfolio Management, Financial AnalystsJournal and the Journal of Finance.He has received three Bernstein Fabozzi/Jacobs Levy Awards for Best Article in TheJournal of Portfolio Management, in 2004,2005 and 2014. Financial Analysts Journalhas twice awarded him the Graham and DoddAward for the year’s best paper, and has alsorecognized his work with the Graham andDodd Best Perspectives and Readers’ Choiceawards. In 2006, the CFA Institute presentedCliff with the James R. Vertin Award, whichis periodically given to individuals who haveproduced a body of research notable for itsrelevance and enduring value to investmentprofessionals.Prior to cofounding AQR Capital Management,Cliff was a managing director and directorof quantitative research for the assetmanagement division of Goldman Sachs.He is on the editorial board of The Journalof Portfolio Management, the governingboard of the Courant Institute of MathematicalSciences at New York University, the boardof directors of the Q-Group and the boardof the International Rescue Committee. Hereceived a BS in economics from the WhartonSchool and a BS in engineering from theMoore School of Electrical Engineering at theUniversity of Pennsylvania, graduating summacum laude in both. He received an MBA withhigh honors and a PhD in finance from theUniversity of Chicago, where he was EugeneFama’s student and teaching assistant for twoyears (so he still feels guilty when trying tobeat the market).
Key DefinitionsMomentum InvestingAn investment strategy that buys oroverweights securities that performed wellversus their peers and underweights orshorts securities that underperformed.The aim is to show that “anyone repeating these myths, in any dimension, afterreading this piece is simply ignoring the facts,” the authors say in the article. Theco-authors are AQR Capital Management Managing Partner Clifford Asness, hispartners and colleagues Andrea Frazzini and Ronen Israel, and Tobias Moskowitz,the Fama Family Professor of Finance at the University of Chicago Booth Schoolof Business.The authors give us a comprehensive overview of the literature, results from theirown empirical studies, and perspective on why misconceptions about momentuminvesting persist. They acknowledge that the momentum strategy by itself has notfared as well over the past few years. Smart investors need to combine momentumwith other strategies, notably value investing, to produce positive risk-adjustedreturns over the long term, say the authors.You can read about the myths—why they persist and how they are debunked—in thefull article. Here are some highlights:Using KENNETHFRENCH’s well-knowndata set, almost half ofmomentum’s premiumcomes from the longside versus the shortside. The momentum premium is evident in over 200 years of US market data; forexample, between 1927 and 2013, there was an 8.3% annual average spread ofrecent winners over recent losers. Using Kenneth French’s well-known data set, almost half of momentum’spremium comes from the long side versus the short side. The momentum premium is significant among large-cap stocks, which is of onlyslightly smaller magnitude than small-cap stocks. Using AQR Capital data of live trades between 1998 and 2013, momentum doesnot show unsustainably high trading costs.Questions And AnswersWhat led you to debunk the myths of momentum investing now?Using AQR Capital dataof live trades between1998 and 2013,momentum does not showunsustainably high tradingcosts.Asness: These myths have been around for a long time, but they continue to berepeated despite a large body of evidence and literature refuting them. We decided itwas time to bring all that evidence and research together to comprehensively attemptto dismantle these myths.Which myths seem to be the most confusing for institutionalinvestors, and why? Have you had to explain away a lot of thesemisconceptions for your clients?Israel: I think the three myths that are most misunderstood among institutionalinvestors are whether momentum survives transaction costs, whether there is anytheory behind momentum, and (this is related) if the returns will go away. We spenda lot of time providing answers to these important questions, using both empiricalevidence and academic theory.There’s been a fair amount of research done in this area. Why is itthat momentum investing isn’t more widespread among investors?Frazzini: Part of the issue is that while there is a lot of evidence refuting thesemyths, the research is spread out and not tied together cohesively. Our paper attemptsto address exactly that, which should hopefully provide for greater, widespreadunderstanding of the facts and the issues in a unified way.2 // Practical Applications
What makes momentum investing different or beneficial? What arethe key takeaways that you’d like readers of your article to grasp?Frazzini: We don’t think momentum is different. Rather, we think it is a style ofinvesting on equal footing with other styles—like value—based on long-term, strongempirical evidence and, equally important, solid economic intuition. It is a strongstrategy on its own, but more important, it helps diversify a portfolio with exposureto other styles, like value.OTHER RESEARCHERSWRITING ABOUTMOMENTUM KENT DANIEL,Columbia University NARASIMHANJEGADEESH,Emory University SHERIDAN TITMAN,University of Texas at Austin MARK GRINBLATT,UCLAGiven the poor results of the strategy during market crashes, as in2009, is more study needed? What can momentum investors do tobetter position themselves?Moskowitz: Actually, momentum investing didn’t suffer during the market crash.Momentum suffered after the market crash, beginning in late March/early April2009, when there was a sharp reversal in the market. We know that momentum cansuffer during periods of sharp reversals, as the strategy is betting on a continuationof performance. The best way for a momentum investor to protect against thesescenarios is to diversify with other styles, like value.Who are other authors whose work on momentum investing you like?Moskowitz: There are a number of great researchers out there working on thesetopics, including a few of our colleagues at AQR: John Liew, Lasse Pedersenand Antti Ilmanen. Kent Daniel of Columbia University has also done a lot onmomentum, specifically looking at the bad times for the strategy. NarasimhanJegadeesh of Emory University and Sheridan Titman of the University of Texasat Austin were co-authors on the original study on momentum and both continueto write about it today. Mark Grinblatt at UCLA is another name who has writtensome seminal work (and was Moskowitz’s Ph.D. advisor).Q: Our subscribers like to learn a little more about the authors: whatdo you read for fun? Or, what do you like to do to relax when notdoing research/working?Asness, Frazzini, Israel,Moskowitz—Their wives and kidsget a little bored ofhearing about value andmomentum.All Authors: This is it. This is all we do. This is our fun. We also spend timewith our wives and kids, though they get a little bored of hearing about value andmomentum, unfortunately. Perhaps we will grow as people some day, or they willadapt to us. We are clearly hoping for the latter.Q: What’s next on the research front? What areas are youworking on?Asness: The four of us are currently working on a related paper: Fact, Fiction andValue Investing. Similar to what we did for momentum here, we think we can helpdispel a lot of the myths around value investing. We take the same approach byoutlining 10 myths of value investing, then proceeding to dismantle them by bringingtogether the research and evidence that refutes these myths.To order reprints of this report, please contact Dewey Palmieriat dpalmieri@iijournals.com or 212-224-3675.The views and opinions expressed are those of the authors and do not necessarily reflect the viewsof AQR Capital Management, its affiliates, or its employees; do not constitute an offer, solicitationof an offer, or any advice or recommendation, to purchase any securities or other financialinstruments, and may not be construed as such. Diversification does not eliminate the risk ofexperiencing investment losses.3 // Practical Applications
Andrea FrazziniRonen IsraelTobias J. omtobias.moskowitz@chicagobooth.eduAndrea is a Principal at AQR CapitalManagement. He is a senior memberof the firm’s Global Stock Selectionteam, focusing on research and portfoliomanagement of its Long/Short and LongOnly equity strategies.Ronen is a Principal at AQR CapitalManagement. His primary focus is onportfolio management and research atthe firm. He was instrumental in helpingto build AQR’s Global Stock Selectiongroup and its initial algorithmic tradingcapabilities, and he now also runs theGlobal Alternative Premia group, whichemploys various investing styles acrossasset classes.Toby is the Fama Family Professor ofFinance at the University of ChicagoBooth School of Business and aManaging Director at AQR CapitalManagement. He contributes to researchon asset pricing and investment issuesrelated to domestic and internationalstrategies for AQR’s Global AlternativesPremia team. He is also a researchassociate at the National Bureau ofEconomic Research.Andrea has published in top academicjournals and won several awards for hisresearch, including the Bernstein Fabozzi/Jacobs Levy Award from The Journalof Portfolio Management, the AmundiSmith Breeden Prize, the Fama–DFAPrize, the Barclays Global Investors (BGI)Michael Brennan Award and the PanAgoraCrowell Prize.Prior to joining AQR, Andrea was anassociate professor of finance at theUniversity of Chicago’s Graduate Schoolof Business and a Research Associateat the National Bureau of EconomicResearch. He also served as a consultantfor DKR Capital Partners and J.P. MorganSecurities. He earned a BS in economicsfrom the University of Rome, III. an MSin economics from the London School ofEconomics and a PhD in economics fromYale University.4 // Practical ApplicationsRonen has published in the Journal ofFinancial Economics and elsewhere,and sits on the executive board of theUniversity of Pennsylvania’s JeromeFisher Program in Management andTechnology. He has been a guestspeaker at Harvard University, ColumbiaUniversity, the University of Chicago,the University of Virginia and New YorkUniversity, and is a frequent conferencespeaker.Prior to joining AQR, Ronen was asenior analyst at Quantitative FinancialStrategies. At the University ofPennsylvania, Ronen earned a BS ineconomics from the Wharton Schooland a BAS in biomedical science fromthe School of Engineering and AppliedScience. He also holds an MA inmathematics, specializing in mathematicalfinance, from Columbia.Toby has won numerous awards for hisacademic research, including the AmundiSmith Breeden and Brattle Prizes fromThe Journal of Finance, the BarclaysGlobal Investors (BGI) Michael BrennanAward for the best paper in the Review ofFinancial Studies, twice, the WhiteboxPaper Prize and the Swiss FinanceOutstanding Paper Award. In 2007, Tobywas awarded the Fischer Black Prize bythe American Finance Association, whichrecognizes the best financial economistunder the age of 40, and in 2011 hereceived the Ewing Marion KauffmanPrize Medal for Distinguished Researchin Entrepreneurship from the KauffmanFoundation, which recognizes the largestcontribution to entrepreneurial researchfrom scholars under the age of 40.Toby’s work has often been cited in printand broadcast media, and, notably, in a2005 speech by former Federal ReserveChairman Alan Greenspan. He earned aBS in industrial management/engineeringwith honors and an MS in finance fromPurdue University, as well as a PhD infinance from UCLA.
Fact, Fiction and Value Investing. Similar to what we did for momentum here, we think we can help dispel a lot of the myths around value investing. We take the same approach by outlining 10 myths of value investing, then proceeding to dismantle them by bringing together the research and evidence that refutes these myths.
Fact, Fiction and Momentum Investing – Page 3 Please note, of course, that we make no claim that momentum works all the time. In fact, of late (this year and the last few years), momentum as a strategy has had a more difficult time. Still, the fact is momentum is a risky variable factor (as they all are) with an impressive long-term average
Fiction Story Frame Fiction Story Map Fiction Vocabulary Study Fiction Write a Creative passage Non-Fiction Templates Non-fiction Before During After Non-Fiction Book Report Non-fiction Cause and Effect Non-fiction Closest-Farthest Non-fiction Compare
8. In Maya mythology, a god breaking the Sacred Oath is of no consequence. FACT or FICTION 9. Ixtab and Ah-Puch are the best of friends. FACT or FICTION 10. The calendar systems developed by the Maya are still influential today. FACT or FICTION 1. FACT 2. FICTION Ah-Puch is a stinky, skeletal one. 3. FACT 4. FACT 5. FACT 6. FACT 7. FACT 8.
CHAPTER 3 MOMENTUM AND IMPULSE prepared by Yew Sze Ling@Fiona, KML 2 3.1 Momentum and Impulse Momentum The linear momentum (or "momentum" for short) of an object is defined as the product of its mass and its velocity. p mv & & SI unit of momentum: kgms-1 or Ns Momentum is vector quantity that has the same direction as the velocity.
1. Science Fiction and Extro-Science Fiction Let's examine this difference: science fiction and extro-science fiction. Generally speaking, in science fiction the relation of fiction to science seems to be the following: it
1. Impulse and Momentum: You should understand impulse and linear momentum so you can: a. Relate mass, velocity, and linear momentum for a moving body, and calculate the total linear momentum of a system of bodies. Just use the good old momentum equation. b. Relate impulse to the change in linear momentum and the average force acting on a body.
momentum is kg·m/s. Linear Momentum Linear momentum is defined as the product of a system's mass multiplied by its velocity: p mv. (8.2) Example 8.1Calculating Momentum: A Football Player and a Football (a) Calculate the momentum of a 110-kg football player running at 8.00 m/s. (b) Compare the player's momentum with the
Reading music from scratch; Easy, effective finger exercises which require minimal reading ability; Important musical symbols; Your first tunes; Audio links for all tunes and exercises; Key signatures and transposition; Pre scale exercises; Major and minor scales in keyboard and notation view; Chord construction; Chord fingering; Chord charts in keyboard view; Arpeggios in keyboard and .
