Swedroe: Momentum Investing Pays Off

April 19, 2013

Larry Swedroe dives into the numbers to check whether a momentum-focused fund is in fact delivering on the promise of momentum premium.

An investing strategy is really only worthwhile for investors if it's not so expensive that it wipes out gains. Today we'll look at whether the momentum premium can be captured in the form of additional gains.

Three years ago, AQR Funds launched three momentum mutual funds:

  • A U.S. large-cap momentum fund (AMOMX)
  • A U.S. small-cap momentum fund (ASMOX)
  • An international momentum fund (AIMOX)


All three funds are long-only, meaning they do not short negative momentum stocks. For value-tilted portfolios, exposure to momentum can provide an important diversification benefit, because momentum is negatively correlated with value.

Now that we have three years of data, we can examine whether a live fund is able to capture the returns of the strategy and also see the impact of the fund's expenses and trading costs. This is important to consider, as critiques of momentum are that it's a high turnover strategy, and that high momentum stocks have high trading costs. If this were true, momentum strategies would only work in theory and not in practice.

When AQR launched its funds, it also launched a series of long-only momentum indexes. The indexes are based on the standard academic approach to defining momentum, are calculated by S&P and are available on Bloomberg.

The AQR funds are rules based, but they're not strictly index funds. They attempt to improve on the indexes by trading patiently to optimize trading costs and by rebalancing more frequently. These differences mean that the funds won't exactly match the indexes, and there will be random tracking error.

We can evaluate how effectively the funds have delivered the returns of momentum. The table below compares the returns of the funds to the returns of the index since the inception of the funds through Dec. 31, 2012.





AQR Fund




AQR Index




Fund minus index




Fund expenses





AMOMX has outperformed its own index, while the other two funds have underperformed their indexes. One thing to keep in mind when examining these results is that indexes don't incur management fees or trading costs. On an expectations basis, you would expect the funds to underperform the index by these expenses. The question as to whether momentum strategies are implementable seems to have been answered. AQR has been able to capture the returns of a long-only momentum strategy through its funds.


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