Understanding Factor Investing
Momentum Factor Strategies
What Is Momentum Investing?
Momentum investing centers on the idea that assets that have performed well recently have the potential to perform well in the near future. This strategy captures behavioral biases and market inefficiencies by riding the wave of upward (or downward) price trends.
Momentum is one of the most widely studied and persistent factors across global markets, often used to enhance returns or as a tactical overlay
How It Works
Momentum has the potential to be implemented across different time horizons and sectors, and often works best when combined with risk management overlays.
- Security Selection: Based on recent price performance—typically one-to-12-month relative returns.
- Screening Metrics: Relative strength, moving averages, and technical indicators.
- Rebalancing: Strategies are often updated regularly to stay aligned with prevailing trends.
Potential Benefits of Momentum
- Behavioral Advantage: Leverages investor underreaction to news and earnings.
- Diversification: Low correlation to value and defensive factors.
- Adaptive: Responds dynamically to changing market conditions.
Key Risks
- Reversal Risk: Trends may abruptly reverse, causing sharp losses.
- Turnover: Frequent rebalancing increases trading costs and tax implications.
- Crowding: Popular momentum names may become over-owned and volatile.
Momentum vs. Other Factors
Momentum is often used tactically or in multi-factor frameworks to complement more Value or Defensive strategies.
| Feature | Momentum | Value | Defensive |
|---|---|---|---|
| Basis | Recent price performance | Fundamental undervaluation | Low volatility, stable earnings |
| Ideal Environment | Trending or strong markets | Market recovery | Risk-off or bear markets |
| Turnover | High | Low to moderate | Low |
| Risk Profile | Higher | Moderate | Low |
Source: AQR. For informational purposes only. The comparisons herein are not exhaustive and do not address all relevant features, risks, or considerations associated with the strategies discussed. Investors should conduct their own due diligence before making any investment decision.
Who Typically Uses Momentum Strategies?
- Growth-oriented investors.
- Tactical allocators seeking to capture price trends.
- Portfolio managers diversifying factor exposure.
Related Funds
- AQR Global Equity Fund
- AQR International Momentum Style Fund
- AQR Large Cap Momentum Style Fund
- AQR Small Cap Momentum Style Fund
Back to Understanding Factor Investing
DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus or summary prospectus containing this and other important information, please call 1-866-290-2688 or click here to view or download a prospectus online. Read the prospectus carefully before you invest.
The information contained on this website has been provided solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. The information on this site is directed only at persons or entities in any jurisdiction or country where such access to information contained on this website and use of such information is not contrary to local law or regulation. Accordingly, all persons who access this website are required to inform themselves of and to comply with any such restrictions. Past performance is not a guarantee of future performance.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such.
View definitions of benchmarks and other terms used here.
The investment strategy and themes discussed herein may not be in the best interest of investors depending on their specific investment objectives and financial situation.
Diversification does not eliminate the risk of experiencing investment losses. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
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