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I like Cliff Asness. Although I'm not a fan of momentum applied to individual securities, Asness' firm, AQR Research, created the first fully disclosed momentum funds available to the general public (AMOMX,ASMOX,AIMOX). AQR's low volatility risk parity fund (AQRNX) has outperformed the other publicly available risk parity funds during the two years of its existence. (I'd be cautious of bond-heavy risk parity funds now. The last time 10 year Treasuries returned only 2%, bonds went into a 45 year bear market.) Asness even has a sense of humor, saying he has nightmares about being attacked by a flock of wild black swans! More money managers should have such nightmares. In 2009, Asness and his colleagues released a working paper called "Value and Momentum Everywhere". The paper did a nice job showing that momentum works well in many different asset classes - foreign and U.S. stocks, country bonds and indices, commodities and currencies. Asness et al also tried to show how value would have performed with these same assets. Identifying value with equities is pretty straight forward; book to market is commonly used.. However, trying find comparable value metrics for other assets is not so easily done. There are no established ways for doing this, and efforts to do so may seem rather contrived. Nevertheless, Asness et al reach the conclusion that value and momentum do well when mixed together 50/50, since the correlations between them are weak. So I keep getting emails asking about using value with momentum. The problem with that (besides the non-trivial one of determining value in non-equity markets) stems from the Asness momentum results.They are not nearly as good as the ones I get from multi-asset momentum at a higher level then individual equities.. Since determining non-equitiy value can be problematic, let's look at just equities to see what I mean. Below are the returns from January 1975 through December 2011 for the MSCI U.S. Value and MSCI EAFE Value indices, as well as a simple momentum strategy that is long either U.S. Treasury bills, the MSCI U.S. index, or the MSCI EAFE index based on 12 month momentum. Positions are adjusted monthly. Transaction costs are negligible, with just 1.4 switched per year. Equity Momentum U.S. Value EAFE Value Annual Return 14.3 13.1 14.1 Annual Std Dev 12.4 15.1 17.7 Annual Sharpe .66 .47 .45 Max Drawdown -26.0 -54.6 -58.6 You can see that momentum easily outperforms the value indices. Let's now combine momentum with value as per Asness by weighting momentum 50% and each of the value indices 25%. Which results would you choose? Equity Momentum Momentum w/ Value 50/50 Annual Return 14.3 13.6 Annual Std Dev 12.4 12.3 Annual Sharpe .66 .61 Max Drawdown -26.0 -37.8 The superiority of momentum over value is much greater when you construct multi-asset momentum portfolios, like we do, instead of using one limited only to equities. Should there be value and momentum everywhere? I don't think so - not here anyway.
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