September 19, 2011

Here Comes Market Neutral Momentum...Sort of

QuantShares recently launched the U.S. Market Neutral Momentum Fund (MOM).  This fund comes close to replicating the strategy followed in many momentum research papers.  From among a universe of the 1000 largest U.S. companies, the fund goes long the 200 strongest and short the 200 weakest companies based on 12 month past performance with a 1 month lag.  Positions are readjusted monthly and are filtered so as to be neutral with respect to sector weightings. The fund’s expense ratio (not including the extra costs of carrying short positions) is .81%. It will be interesting to see how a long/short fund of the the top and bottom 20% of momentum stocks can perform over time after high transaction costs and management fees.

I was actually surprised to see this ETF, since long/short momentum using individual stocks has been subject to drawdowns on the order of 80% in the past (momentum crashes). Even more surprising is the fact that QuantShares also has an anti-momentum ETF (NOMOM) that reverses the logic of their momentum fund. This fund must be for those who want a proven way to lose money. The only time this strategy has made sense in the past has been in 1932 and 2008 following massive market sells off when anti-momentum ruled for a short time.  I’m still scratching my head about this fund. I guess life is like a box of chocolates.  You never know what you’re gonna get.  I'd be very surprised if the QuantShares momentum funds are successful.