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 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%. 

At first glance, I thought this might be an attractive portfolio addition for conservative investors given that market risk is offset by an equal dollar amount of short positions.  I wanted to see the long term performance record of the underlying Dow Jones U.S. Thematic Market Neutral Index to judge the impact of management fees and monthly transaction costs, which could have a large impact on performance given monthly rebalancings.  When I went to the QuantShares website to bring up the index values, I was surprised to see that the index has data going all the way back to….. August 2011. It would have been easy to construct and post index values going back 35 years instead of just 1 month.

 QuantShares also came out with other market neutral ETFs that base themselves on factors such as value, beta, size and quality.  None of these has the same anomaly value as momentum.  Even more surprising is the fact that QuantShares issued an anti-momentum ETF (NOMOM) that reverses the logic of their momentum fund. This must be for masochists who want a proven way to lose money. I’m still scratching my head about all this. I guess life is like a box of chocolates.  You never know what you’re gonna get.