Momentum Investing: A Case Study

1.1.6.11 Momentum Investing

Momentum investing is a relatively new investment strategy. It is a method of picking stocks that is closely related to technical analysis.

Momentum investors look for stocks that are moving at faster rate than the market or faster than current investor expectations at least. They also seek out average performing stocks whose prospects appear to be improving. Momentum investors usually target companies with the largest price changes over the most recent months and the companies whose earnings are growing very quickly. At the first sign of a dip in the price of the stock, they usually sell.

Most momentum investors are indifferent between long and short positions, they will go long or short on a stock provided they

They find evidence that hedge funds deliver, on average abnormal performance on an equal- and value-weighted basis, as well as across investment strategies, domiciles, size categories and time-periods. Apart from average performance over a given time period, a crucial question for investors is whether performance can be exploited successfully by picking funds that performed well in the past and will perform well in the future. In other words, investors are interested in whether there is performance persistence over time. This means that Hedge Funds can take advantage of the performance of hedge funds who have performed better in the previous years. The use of advanced econometric techniques is particularly relevant since although the average hedge fund appears to add value over long sample periods, there is evidence that investors could improve the timing of their entry and exit decisions into individual hedge

These improvements are likely to increase costs, but there is evidence that suggests that attention to risk management and operational risk is important for performance. Researchers investigate the determinants and effectiveness of methods that hedge funds use to manage portfolio risk. They find that funds in their sample that use formal models performed better in the extreme down months of 2008 and, in general, had lower exposures to systematic risk. Furthermore, funds employing Value-at-Risk and stress testing had more accurate expectations of how they would perform in a short-term equity bear market. They use a complete set of SEC filing information on hedge funds and found that while operational risk is more significant than investment risk in explaining fund failure, there is a significant and positive interaction between operational risk and investment