Factor Momentum Everywhere JPM Quant 19

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2019 FAC TOR INVESTING
FOURTH EDITION
Factor Momentum Everywhere

Tarun Gupta and Bryan Kelly
Factor Momentum Everywhere
Tarun Gupta and Bryan Kelly
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P
Tarun Gupta rice momentum is most com- factor momentum and stock momentum
is a managing director at monly understood as a phenom- are correlated, they are also complementary.
AQR Capital Management
enon in which assets that recently Factor momentum earns an economically
LLC in Greenwich, CT.
tarun.gupta@aqr.com enjoyed high (low) returns relative large and statistically significant alpha after
to others are more likely to experience high controlling for stock momentum. Nor does
Bryan K elly (low) returns in the future. It is customarily factor momentum displace stock momentum.
is a vice president at AQR implemented as a cross-sectional trading Because of stock momentum’s especially
Capital Management LLC strategy among individual stocks ( Jegadeesh strong hedging benefit with respect to value,
in Greenwich, CT, and
professor of finance at Yale
and Titman 1993; Asness 1994) or long-only we find a significant benefit to combining
School of Management in equity portfolios (Moskowitz and Grinblatt factor momentum, stock momentum, and
New Haven, CT. 1999; Lewellen 2002). It has an impressive value in the same portfolio. 1
bryan.kelly@aqr.com and robust track record of risk-adjusted per- In recent decades, academic literature
formance (Asness et al. 2014; Geczy and and industry practice have accumulated
Samonov 2016). dozens of factors that help explain the co-
Grouping stocks based on relative cross- movement and average returns among indi-
section performance has led many to inter- vidual stocks. We build and analyze a large
pret momentum as a strategy that isolates collection of 65 such characteristic-based fac-
predominantly idiosyncratic momentum tors that are widely studied in the academic
(e.g., Grundy and Martin 2001; Chaves literature. From this dataset, we establish
2016). In this article, we document robust factor momentum as a robust and pervasive
momentum behavior among the common phenomenon based on the following facts.
factors that are responsible for a large fraction Serial correlation in returns is the
of the covariation among stocks. A portfolio basic statistical phenomenon underlying
strategy that buys the recent top-performing momentum and is thus the launching point
factors and sells poor-performing factors (i.e., for our analysis. First, we show that indi-
that exploits factor momentum) achieves sig- vidual factors exhibit robust time-series
nificant investment performance above and momentum (Moskowitz, Ooi, and Pedersen
beyond traditional stock momentum. On 2012), a performance persistence phenom-
a standalone basis, our factor momentum enon by which an asset’s own recent return
strategy outperforms stock momentum,
industry momentum, value, and other com- 1
This is especially true when value is con-
monly studied investment factors in terms structed following the HML-Devil refinement of
of Sharpe ratio. Furthermore, although Asness and Frazzini (2013).
Quantitative Special Issue 2019 The Journal of Portfolio Management 1

(in an absolute sense rather than relative to a peer group) one-month horizon, and this short-horizon persistence
predicts its future returns. Persistence in factor returns is unexplained by UMD. We find that there are benefits
is strong and ubiquitous. The average monthly AR(1) to longer formation periods as well, though the perfor-
coefficient across all factors is 0.11; it is positive for 59 mance of TSFM becomes more similar to UMD when
of our 65 factors and is significantly positive in 49 cases. the formation window is extended to include the most
Second, we demonstrate that individual factors can recent 12 months.
indeed be successfully timed based on their own past An important differentiating feature of TSFM is its
performance. A time-series momentum trading strategy behavioral stability with respect to look-back window.
that scales exposure to a given factor in proportion with TSFM exhibits positive momentum whether it is based
its own past one-month return generates excess perfor- on prior one-month, one-year, or even five-year per-
mance over and above the raw factor. This individual formance. This contrasts starkly with stock-based
time-series momentum alpha (i.e., after controlling for a momentum strategies. For both short (one month) and
passive investment in the factor) is positive for 61 of the long (beyond two years) formation windows, stocks
65 factors and is statistically significant for 47 of them. in fact exhibit reversals as opposed to momentum (De
The annualized information ratio of this strategy is 0.33 Bondt and Thaler 1985; Jegadeesh 1990).
on average over all 65 factors. TSFM is an average of time-series momentum
Third, a combined strategy that averages one- strategies on individual factors. A natural alternative
month time-series momentum of all factors earns an strategy is to construct factor momentum relative to the
annual Sharpe ratio of 0.84, exceeding the performance performance of the other factors in the cross section, as
of any individual factor’s time-series momentum. We in the Jegadeesh and Titman (1993) approach. We refer
refer to this combined portfolio of individual factor to this as cross-section factor momentum (CSFM). We find
timing strategies as time-series factor momentum (TSFM). that CSFM and TSFM share a correlation above 0.90
It performs similarly well with longer formation for any formation window, and the standalone average
windows. For example, the strategy’s Sharpe ratio is returns and Sharpe ratios of CSFM and TSFM are very
0.70 when based on previous 12-month factor perfor- similar. However, when we regress TSFM returns on
mance and remains at 0.72 with a five-year look-back CSFM, we find positive and highly significant TSFM
window. TSFM is strongest with a one-month look alphas, yet CSFM has generally negative (and signifi-
back, although we continue to find positive and significant) alphas when controlling for TSFM. Their high
cant performance with longer nonoverlapping windows correlation and opposing alphas reveal that TSFM and
as well (i.e., based on momentum over 2-12 or 13-60 CSFM are fundamentally the same phenomenon but
months prior to formation). that the time-series approach provides a purer measure
The TSFM strategy is largely unexplained by of expected factor returns than does the cross-sectional
other well-known sources of excess returns. It has two method.
natural benchmarks for comparison. One is the equal- We also investigate the turnover and transaction
weighted average of the 65 raw factors, which itself has costs of factor momentum. Our conclusions regarding its
an impressive annual Sharpe ratio of 1.07. TSFM earns outperformance are unchanged when we look at Sharpe
large and significant alphas relative to this, indicating ratios net of transaction costs. The net standalone Sharpe
that the performance of TSFM arises from beneficial ratios of TSFM and CSFM continue to exceed those
timing and is not simply picking up static factor per- of stock momentum, industry momentum, short-term
formance. The second natural benchmark is the tradi- reversal, and the Fama–French factors.
tional stock-level momentum strategy using the 2-12 Our last empirical finding is that factor momentum
formation strategy of Asness (1994), which we refer to is a global phenomenon. We demonstrate its robustness
as UMD (up minus down) henceforth. UMD has an in international equity markets with magnitudes on par
annual Sharpe ratio of 0.56 in our sample. In spanning with our US findings. We find similar outperformance
regressions, UMD partially explains the performance of of TSFM over international versions of UMD, industry
TSFM, particularly when TSFM is based on a matched momentum, and CSFM.
2-12 formation period (i.e., excluding the most recent Each of our 65 factors represents a large, diversi-
month). Factor momentum, however, is strongest at the fied long–short portfolio. These portfolios are (to close
2 Factor Momentum Everywhere Quantitative Special Issue 2019

approximation) devoid of idiosyncratic stock-level factor analysis.2 We focus on factors that can be con-
returns, which are washed out by the law of large structed beginning in the 1960s. This excludes, for
numbers. Yet the TSFM strategy that buys (sells) example, Institutional Brokers’ Estimate System–based
factors with high (low) past returns outperforms the analyst research factors, which only become available
traditional stock momentum strategy. In other words, in the late 1980s.
factor momentum captures variation in expected factor We for m factors as fol lows. First, we
returns of roughly similar magnitude to that in stock- cross-sectionally winsorize the top and bottom 1% of
level momentum, despite being purged of idiosyncratic raw characteristic values each period. Next, we split the
returns by construction. Factor momentum thus iso- universe into large and small stocks with a cutoff equal
lates persistence in the common factors and shows that to median NYSE market capitalization (or the 80th per-
momentum is a more general phenomenon, existing centile of market capitalization for international stocks).
alongside idiosyncratic stock return momentum. Within size bins, we divide further into low/medium/
We build upon recent work by Avramov et al. high characteristic values according to a 30/40/30 per-
(2016) and Arnott et al. (2018) in analyzing momentum centile split. Breakpoints are taken over NYSE stocks for
among factors. Their work focuses only on cross-section the US sample or all stocks in the international sample.
factor momentum and only in the United States. Our Within these six bins, we form value-weighted portfo-
findings differ from previous work in establishing that lios and then combine these into an ultimate long–short
factor momentum is best understood and implemented factor portfolio according to 0.5 × (Large High + Small
with a time-series strategy rather than a relative cross- High) - 0.5 × (Large Low + Small Low), reconstituting
sectional approach. Our finding that TSFM explains portfolios each month.
the performance of stock momentum is likewise a new Our factor list includes, among others, a variety
contribution to the literature. We also provide a more of valuation ratios (e.g., earnings/price, book/market);
expansive view of factor momentum, studying a more factor exposures (e.g., betting against beta); size, invest-
comprehensive collection of US equity factors, and we ment, and profitability metrics (e.g., market equity, sales
are the first to document factor momentum in interna- growth, return on equity); idiosyncratic risk measures
tional equity markets. (e.g., stock volatility and skewness); and liquidity mea-
The behavior of factor momentum is distinctly sures (e.g., Amihud illiquidity, share volume, and bid–
reminiscent of work by Moskowitz, Ooi, and Pedersen ask spread).
(2012), who demonstrated that asset class indexes may
be timed based on their recent past performance. Aggre- FACTORS AT A GLANCE
gate commodity, bond, and currency indexes are rightly
viewed as factors within those asset classes, and as such Exhibit 1 lists the variables and basic performance
the results of Moskowitz, Ooi, and Pedersen (2012) can characteristics. We report each factor’s average return,
be understood as a manifestation of factor momentum. Sharpe ratio, and Fama and French (2016) five-factor
Taken together with the ubiquity of our equity-based alpha (returns and alphas are in percent per annum).
findings of factor momentum in the time series, in the The Appendix provides additional details, including a
cross section, and around the world, we conclude that factor description and the original articles that analyzed
there is indeed factor momentum everywhere. each factor (we follow these articles as closely as possible
when constructing our factor dataset). We orient the
FACTOR SAMPLE long–short legs of each factor such that the predicted
sign of the factor’s expected return is positive (according
We construct 65 characteristic-based factor portfo- to the paper originally proposing each factor). Note that
lios. Our aim is to cover the expanse of factors proposed this does not mean that all factors have positive average
in the academic literature that studies the cross section returns in our sample—we find that 3 of 65 have nega-
of stock returns, subject to constraints. We cover the tive average returns when extended through 2017, and
most well-cited and robust factors and have a substan-
tial overlap with recent research on high-dimensional 2
See Harvey, Liu, and Zhu (2016); McLean and Pontiff
(2016); Gu, Kelly, and Xiu (2018); and Kelly, Pruitt, and Su (2018).

Exhibit 1
Factor Sample Summary Statistics
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25 are statistically indistinguishable from zero. Mean- Time-Series Factor Momentum
while, the factors with the strongest and most statistically
reliable performance are the best-known usual suspects, The strong autoregressive structure in factor
such as betting against beta, stock momentum, industry returns suggests that it may be possible to time each
momentum, and valuation ratios (cash f low/price, sales/ factor individually based on its own recent performance.
price, and earnings/price). The idea of portfolio timing based on the portfolio’s
Although all factors represent large and diversi- own past return underlies the time-series momentum
fied portfolios, they nonetheless possess rather distinct methodology of Moskowitz, Ooi, and Pedersen (2012).
return behavior. More than half of all factor pairs have We begin by exploring the benefits of portfolio
a correlation below 0.25 in absolute value. Principal timing by applying a time-series momentum strategy
component (PC) analysis also supports the view that an one factor at a time. We focus on one-month holding
unusually large amount of the portfolio return variation periods and consider various formation windows of one
is factor specific: It takes 19 PCs to explain 90% of the month up to five years. Our strategy dynamically scales
65-factor correlation structure, 28 to explain 95%, and one-month returns of the ith factor, f i,t+1, according to
46 to explain 99%. its performance over the past j months
j ,t +1 = si , j ,t × f i ,t +1 ,
f i ,TSFM
FACTOR MOMENTUM
  1 j
 
Factor Persistence si , j ,t = min  max 
 σ i , j ,t
∑f i ,t −τ+1 , −2 ,2 (1)
 
 τ=1
We begin our analysis by investigating the pri-
mary statistical phenomenon underlying momentum: Unpacking Equation 1, we use the scaling term si,j,t
serial correlation in returns. In Exhibit 2, we report to time positions in factor i based on the factor’s return
monthly first-order autoregressive coefficients (denoted over the formation period (t − j to t). If formation returns
as AR(1)) for each factor portfolio along with 95% con- are positive, it buys the factor; if negative, it sells the
fidence intervals. When zero lies outside the confidence factor. We convert recent returns to z-scores by dividing
interval, it indicates that the estimate is statistically sig- by σi,j,t , which is the annualized factor volatility, over
nificant at the 5% level (or, equivalently, the t-statistic the previous three years (for short formation windows,
is greater than 1.96 in absolute value). j < 12) or over the previous 10 years (if j ≥ 12), and we
The strength and pervasiveness of one-month cap z-scores at ±2.4
own-factor serial correlation is stunning. Of our 65 fac- The benefits of factor timing can be assessed in
tors, 59 have a positive monthly AR(1) coefficient, and terms of alpha by regressing the scaled factor on the
the coefficient is statistically significant for 49 of these. raw factor
For comparison, the monthly AR(1) coefficient for the
excess market return is 0.07 during our sample, which f i ,TSFM
j ,t = α i , j + βi , j f i ,t + ei , j ,t
Moskowitz, Ooi, and Pedersen (2012) demonstrated
is powerful enough for implementing a time-series Exhibit 3, Panel A, reports the annualized per-
momentum strategy. The average AR(1) coefficient of centage alphas from the time-series strategy with a one-
our factors is 0.11, and 50 of them have an AR(1) coef- month formation period for each factor, as well as 95%
ficient larger than that of the market. 3 This is a first confidence intervals. The performance of time-series
indication that it may be possible to time factors based momentum in individual factors is extraordinarily per-
on their own past performance. vasive. It is positive for 61 out of 65 factors and statistically
significant for 47 of these. To provide a clearer inter-
pretation in terms of risk–return trade-off, Exhibit 3,
3
We believe that own-factor persistence may be even stronger
than these results portray because any illiquidity imbalance in a Our findings are robust to other estimation choices for σi,j,t ,
4
factor will tend to create some negative serial correlation, and we including shorter windows and exponentially weighted moving
are not directly accounting for that here. averages, and to other caps such as ±1.

Exhibit 2
Factor Return Monthly AR(1) Coefficients


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Panel B, shows Sharpe ratios for each individual factor TSFM earns an annualized average return of 12.0%.
momentum strategy: It exceeds 0.20 for 56 factors and The last bar in Panel A reports the alpha from regressing
is statistically significant for 48 of them. the one-month TSFM return on the equal-weighted
Our overall TSFM strategy combines all individual average of raw factor returns. The equal-weighted
factor time-series momentum strategies into a single portfolio of raw factors is itself an impressive strategy,
portfolio. In particular, TSFM aggregates timed factors earning an annualized Sharpe ratio of 1.07. Nevertheless,
(with formation window j) according to the portfolio of individual factor momentum strategies
generates a highly significant 10.3% alpha (t-statistic of
TSFM j ,t = TSFM Long
j ,t − TSFM Short
j ,t 4.6) after controlling for the average of untimed factors.
The last bar in Panel B reports the annual Sharpe ratio
where of the combined factor momentum portfolio. It is 0.84,
exceeding the Sharpe ratio of every individual factor
TSFM Long =
∑1 f TSFM
i { si , j ,t >0} i , j ,t +1
and
momentum strategy.
Exhibit 4 explores how TSFM performance
j ,t
∑1 s
i { si , j ,t >0} i , j ,t changes with alternative implementations. We form
TSFM Short
=
∑1 f TSFM
i { si , j ,t ≤0} i , j ,t +1
the momentum signal using look-back windows of one
month (1-1) up to five years (1-60). We also split out
j ,t
∑1 s
i { si , j ,t ≤0} i , j ,t the 11 months excluding the most recent month (2-12)
for more direct comparability with UMD and the four
That is, the long and short legs are rescaled to form years excluding the most recent year (13-60) to compare
a unit leverage ($1 long and $1 short) TSFM portfolio. the role of long-term versus short-term return trends.

±
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±

±
±

Exhibit 3
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Quantitative Special Issue 2019

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each formation period, and Panel B reports annualized

Sharpe ratios. The 12-month TSFM strategy achieves
an expected return of 9.5% and a Sharpe ratio of 0.70.
Panel A reports the raw TSFM average return for
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The Journal of Portfolio Management 7

overall performance driver, large positive and significant
shows that although one-month factor momentum is the
7.1% per annum with a Sharpe ratio of 0.72. Panel A
With a look-back as long as five years, TSFM earns
Exhibit 4
Risk-Adjusted TSFM Performance
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contributions from longer (nonoverlapping) 2-12 and section of all factors. CSFM buys (sells) factors that have
13-60 formation windows remain as well, with Sharpe recently outperformed (underperformed) peers, rather
ratios of 0.54 and 0.53, respectively. than sizing factor exposures based on their own recent
When we benchmark TSFM against the equal- performance. For example, if all factors recently appre-
weighted average factor (EW, shown in Panel C) or ciated, TSFM will take long positions in all of them.
against the Fama–French f ive-factor model (FF5, CSFM, on the other hand, will be long only the relative
Panel D), the excess performance of TSFM is little outperformers and will short those with below-median
affected. For a one-month formation, EW explains less recent returns (despite their recent positivity).5
than one-sixth of the TSFM average return, and at one Exhibit 5 explores the performance of CSFM with
year it explains less than one-third. The Fama–French various look-back windows for portfolio formation (in
model explains less than one-tenth of TSFM’s average analogy with Exhibit 4). The results show that CSFM
return for all formation windows. and TSFM have similar behavior. The Sharpe ratios of
CSFM are slightly inferior to TSFM, and it has slightly
Cross-Section Factor Momentum smaller alphas with respect to the equal-weighted
An alternative approach to forming a factor 5

CSFM cross-sectionally de-means factors’ formation-
momentum strategy is to take positions in factors based window returns but otherwise follows the same construction as
on the recent performance of factors relative to the cross TSFM.

Exhibit 5
Risk-Adjusted CSFM Performance
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±

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portfolio of raw factors, but their performance patterns returns for each momentum variable, including 1-month
are otherwise closely aligned. and 12-month look-back windows for TSFM and
CSFM, along with the excess market portfolio. Two
Factor, Stock, and Industry Momentum features of this plot stand out. First is the comparatively
steep slope of TSFM. This is consistent throughout the
Next, we directly compare various incarnations of sample rather than being driven by a few good runs.
the momentum effect against each other, including factor (One-month CSFM shares a similarly steep slope, but
momentum (TSFM and CSFM), stock-level momentum the 12-month implementation drops off substantially).
(UMD), short-term stock reversal (STR), and industry Second is the sharp drawdown of UMD, when stock
momentum (INDMOM, following Moskowitz and momentum experienced a loss of 31% from March to
Grinblatt 1999 and Asness, Porter, and Stevens 2000, May 2009 (Daniel and Moskowitz 2016). INDMOM also
for which we use a 1-12 formation strategy). To make a experienced a drawdown of 24% over this time. In con-
clearer comparison among average returns, we rescale trast, factor momentum entirely avoided the momentum
all five series to have an ex post annualized volatility crash. Over the same months, 12-month TSFM and
of 10%. CSFM earned 16% and 15%, respectively (one-month
Exhibit 6 provides a preliminary visual comparison versions of TSFM and CSFM both earned 18%).
of momentum strategies. It shows the cumulative log

Exhibit 6
Cumulative Returns of Momentum Strategies

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Momentum Strategy Return Correlations
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It is well known that stock momentum is con- momentum from a 2-12 strategy, as well as STR, which
centrated in intermediate formation windows of 6 to captures short-term stock reversals that arise in a 1-1
12 months. With very short look-backs (one month) strategy. We compare each of these to TSFM and CSFM
or at long horizons, stocks experience reversals rather with a range of formation choices ranging from 1 month
than momentum. To gain a basic understanding of to 60 months and again splitting out 2-12 and 13-60.
co-movement in strategies, particularly with respect to Exhibit 7 highlights an interesting distinction in the
different formation periods, Exhibit 7 reports momentum time series dynamics of different momentum strategies.
correlations. We include UMD, which describes stock When factor momentum is based on an intermediate

window of 1–12 months, it bears a close correlation with more of CSFM’s performance than they do TSFM’s per-
UMD (0.76 and 0.75 for TSFM and CSFM, respectively, formance, and CSFM’s alphas on UMD and INDMOM
and similar for 2-12 factor momentum). Exhibit 7 also are insignificant for formation windows of a year or
illustrates a close similarity between factor momentum more. Second, CSFM has negative and significant alpha
and industry momentum. relative to TSFM. In other words, although TSFM and
In contrast, with a one-month window, factor CSFM earn similarly high average returns and are highly
momentum behavior is strongly opposite to the stock- correlated, TSFM harvests factor momentum compensa-
based STR strategy (correlation of −0.80 for both TSFM tion more efficiently than CSFM does.
and CSFM). If factor momentum were simply capturing In Exhibit 9, we reverse this analysis to assess the
stock-level persistency, we would expect it to also dis- performance of UMD, INDMOM, and STR after con-
play a short-term reversal (in contrast to the findings of trolling for factor momentum. We report alphas from
Exhibits 4 and 5) and would therefore expect it to be regressions of these factors on TSFM and CSFM with
positively correlated with STR. various formation windows. As in Exhibit 8, bar colors
The last column shows the extremely high correla- correspond to different look-back windows for TSFM
tion between time-series and cross-section approaches (holding UMD, INDMOM, and STR fixed).
to factor momentum. The 1-12, 1-36, and 1-60 TSFM strategies can
Next, we regress TSFM and CSFM on momentum each individually explain most of the performance of
alternatives to understand whether these strategies sub- UMD and INDMOM. The average annual return of
sume factor momentum. Panel A of Exhibit 8 reports UMD is 6.1%, but its alpha versus 12-month TSFM, for
the average return of TSFM from various look-back example, drops below 1% and its t-statistic falls below
windows as well as the alphas of TSFM relative to 1.0. The alpha of INDMOM is slightly negative and is
UMD, INDMOM, and STR. All estimates are accom- likewise insignificant. CSFM is unable to explain the
panied by their 95% confidence intervals. A confidence performance of UMD, but it does capture a large por-
interval that excludes (includes) zero indicates that the tion of industry momentum. The central conclusion
estimate is statistically significant (insignificant) at the from this spanning analysis is that TSFM tends to out-
5% level. Bar colors correspond to different look-back perform, and to a large extent account for, the returns
windows for TSFM and are described in the legend to UMD.
(UMD, INDMOM, and STR look-back windows are Neither TSFM nor CSFM explains short-
held fixed). term reversal. To the contrary, controlling for factor
Controlling for UMD only explains the perfor- momentum boosts the performance of STR from
mance of the 2-12 TSFM strategy. For all other look- an unconditional average return of 3.4% per year to
back windows, TSFM has a significant alpha of at least alphas in excess of 5% and as high as 10.1% versus one-
2% per year versus UMD. For one-month TSFM in month TSFM. Thus, unlike UMD and TSFM, factor
particular, UMD has no explanatory power because the momentum and short-term reversal seem to capture
alpha and raw average returns are essentially the same. distinct patterns in expected stock returns because both
Alphas relative to INDMOM show a pattern similar to have large unexplained alphas relative to each other.
those relative to UMD but are somewhat larger. Con-
trolling for STR in fact raises TSFM’s alpha above its PORTFOLIO COMBINATIONS
raw average return, which is perhaps expected given
their strong negative correlation. The right-most bars in We next investigate the extent to which various
Panel A show the alpha of TSFM relative to CSFM with momentum strategies play an incrementally beneficial
matching formation window. Despite nearly perfect cor- role in a broader portfolio that includes other common
relations between them, TSFM’s alpha is significantly investment factors. In particular, we form ex post (i.e.,
positive for all formation windows and becomes stronger full sample) mean–variance-efficient tangency portfolios
at long horizons. of factors. The first column of Exhibit 10 lists the fac-
Panel B of Exhibit 8 performs the same compar- tors that we consider, which continue to be standard-
ison for CSFM. There are two key distinctions between ized to have 10% annualized volatility to put all factors
Panels A and B. First, UMD and INDMOM explain on equal volatility footing. We include nonoverlapping

Exhibit 8
Comparison of Momentum Strategies
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Relative Performance of UMD, INDMOM, and STR
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Ex Post Tangency Portfolios
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1-1, 2-12, and 13-60 versions of TSFM and CSFM, Column 4 considers the optimal combination of
as well as the 1-12 versions of each. We also include TSFM with UMD and the Fama–French factors. In
UMD, INDMOM, and STR. Finally we investigate this case, 2-12 TSFM takes an exact zero weight and
combinations with the Fama–French five-factor model. is replaced by a significantly positive weight of 0.10 on
Superscripts of single and double asterisks signify that UMD. This combination earns a Sharpe ratio of 1.65
a weight estimate is significantly different from zero at (the five Fama–French factors on their own achieve a
the 5% or 1% level, respectively. tangency Sharpe ratio of 1.09). The same conclusion
The second column reports the standalone Sharpe emerges if we simultaneously include UMD and STR
ratios for each factor. The remaining columns, labeled 1 alongside TSFM (Column 6), where all three enter the
to 7, report tangency portfolio weights among various tangency portfolio with significantly positive weights.
sets of factors. Column 1 shows that the ex post efficient Among the Fama–French factors, MKT, conserva-
combination of 1-1, 2-12, and 13-60 TSFM puts the tive minus aggressive (CMA), and robust minus weak
heaviest weight (0.47) on 1-1 TSFM but also puts sig- (RMW) are significant contributors to tangency across
nificantly positive weight on 2-12 and 13-60 (0.22 and the board.
0.31, respectively). This tangency combination achieves The diversif ication benef its from combining
a Sharpe ratio of 1.07. For CSFM, the tangency portfolio momentum factors with value factors become more
is dominated by a weight of 0.67 on the 1-1 component. pronounced when using the HML-Devil refinement
Column 3 shows that the optimal combination of TSFM of Asness and Frazzini (2013), which incorporates more
and CSFM takes a highly levered position in TSFM timely price data in its value signal construction and
with a large negative offsetting position in CSFM. This significantly outperforms the traditional Fama–French
result restates the fact that TSFM and CSFM are highly HML. Exhibit 11 shows that the correlation of UMD
correlated but have alphas of opposite signs with respect and HML-Devil is −0.64, whereas UMD is only −0.18
to one another. correlated with Fama–French HML. Likewise, the

Exhibit 11
Correlation of Momentum and Value Variants
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correlation of 1-12 TSFM drops from −0.02 with HML momentum with that of other price trend factors.7
to −0.37 with HML-Devil. In terms of formation window, STR is the natural stock-
Motivated by the potential for stronger hedging level benchmark for one-month factor momentum, and
benefits, Exhibit 12 investigates the impact of replacing UMD and INDMOM are most natural for comparison
HML with HML-Devil in our tangency portfolio anal- with 12-month factor momentum. In both cases we see
ysis. Three observations emerge from this table. First, that factor momentum turnover is comparable to, but
our central conclusions regarding factor momentum are slightly lower than, its stock-level counterpart. Panel A
unchanged—it remains a strong contributor to optimal also shows that, like other momentum varieties, factor
multifactor portfolios. Second, HML-Devil takes a momentum involves substantially more trading than
large and statistically significant portfolio weight in Fama–French factors.
all cases, in contrast with the general insignificance Panel B of Exhibit 13 compares the performance
of Fama–French HML in Exhibit 10. Third, UMD of strategies net of transaction costs. Our calculations
becomes one of the most important components of assume costs of 10 bps per unit of turnover (based on
the tangency portfolio thanks to the added diversifica- the estimates of Frazzini, Israel, and Moskowitz 2015).
tion benefits of coupling UMD and HML-Devil.6 In Red bars represent the net annualized Sharpe ratio for
summary, factor momentum and stock momentum are each strategy, along with the gross Sharpe ratio in blue
most effectively used in tandem when devising optimal for comparison. The main takeaway from the exhibit is
portfolios. that although trading costs indeed eat into the perfor-
mance of factor momentum, its net performance con-
IMPLEMENTABILITY tinues to exceed that of UMD, INDMOM, STR, and
the Fama–French factors. For example, the net Sharpe
Momentum strategies are high turnover by ratio of TSFM 1-12 is 0.63, versus 0.70 gross. The next
nature; thus, trading costs are a first-order consider- best net Sharpe ratio among stock-level price trend fac-
ation for understanding the practical usefulness of factor tors is 0.51 for UMD, and the best among Fama–French
momentum in portfolio decisions. Panel A of Exhibit 13 factors is 0.45 for RMW.
compares the average annualized turnover of factor Lastly, Panel B sheds new light on the findings in
Exhibit 9: It reveals that the strong performance of STR
after controlling for factor momentum is illusory. Even
on a standalone basis, the performance of short-term
6
Exhibit 12 highlights the benefits of combining value and reversal is entirely wiped out by transaction costs.
momentum strategies (a point previously emphasized by Asness,
Moskowitz, and Pedersen 2013). Our factor momentum findings
naturally call for an investigation into an analogous factor value
7
strategy that times factors based on factor-level value signals (as Average annualized turnover is defined as the sum of abso-
discussed, for example, by Asness 2016a, 2016b and Asness et al. lute changes in portfolio weights each month, averaged over all
2000). Although an exploration of factor value, and in particular months and multiplied by 12. This describes total two-sided trading
the benefits of combining it with factor momentum, is beyond the volume (both entering and exiting positions) as a fraction of gross
scope of this article, it is a fascinating direction for future research. asset value.

Exhibit 12
Ex Post Tangency Portfolios Including HML-Devil
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FACTOR MOMENTUM AROUND THE WORLD portfolio that aggregates individual time-series factor
momentum strategies has a Sharpe ratio of 0.73 (versus
In this section, we show that each of our main 0.84 in the United States) and earns an alpha of 6.6%
factor momentum conclusions from the US sample is per year after controlling for the equal-weighted port-
strongly corroborated in international equity markets. folio of raw (untimed) factors.
We study three international samples. The Europe Second, international factor momentum demon-
sample includes Austria, Belgium, Switzerland, strates extraordinarily stable performance regardless
Germany, Denmark, Spain, Finland, France, the of formation window (shown in the left-most bars of
United Kingdom, Greece, Ireland, Italy, Netherlands, Exhibit 15). TSFM and CSFM earn essentially the same
Norway, Portugal, Sweden, and Israel. The Pacific average return whether they use a short look-back of
sample includes Australia, Hong Kong, Japan, New one month, all the way through a long look-back of five
Zealand, and Singapore. The broadest international years. As in the US sample, this is a remarkable diver-
sample we consider is global (without the United States) gence from stock-level continuation patterns, where a
and combines Europe, Pacific, and Canada. Because of one-month window gives rise to reversal but a one-year
data limitations, we study only 62 of the original 65 window captures momentum.
factors in the international sample. 8 Third, international factor momentum demon-
First, individual factor returns are highly per- strates large and significant excess performance after con-
sistent. The average AR(1) coefficient is 0.10 (versus trolling for other varieties of international momentum,
0.11 in the United States), is positive for 51 of 62 fac- including UMD, INDMOM, and STR (Exhibit 15).
tors, and is signif icant for 30 of these. Exhibit 14 The TSFM alpha versus UMD is significantly positive
shows that the success of individual factor time-series for all formation windows except 13-60.
momentum strategies (one-month formation) work as Fourth, TSFM and CSFM are more than 0.95 cor-
well for international factors as they do for the United related for all formation windows. Yet TSFM tends to
States. The alpha of momentum-timed factors versus possess positive alpha relative to CSFM, and CSFM earns
raw factors is positive for 55 of 61 factors and is sig- negative alpha versus TSFM; this finding indicates that,
nificant for 22 of these (versus 61 of 65 positive in as in the US sample, TSFM more efficiently captures the
the United States, 47 of those significant). The TSFM benefits of factor momentum.
8
Excluded are ADVERTCHG, AD2MV, and AIM.

Exhibit 13
Turnover and Net Sharpe Ratio
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Fifth, the performance of UMD and INDMOM from Exhibit 17 are qualitatively similar to the US
is explained by factor momentum. Exhibit 16 shows that analysis in Exhibit 10. US and international TSFM 1-1
UMD’s alpha is essentially zero, and INDMOM has a share a correlation of 0.62, and the US and international
negative alpha after controlling for either TSFM or CSFM. 1-12 versions are 0.64 correlated. The ex post tangency
Sixth, international tangency portfolio analysis in portfolio that combines US and international TSFM 1-1
Exhibit 17 highlights the additivity of factor momentum earns an annual Sharpe ratio of 0.83; individually, they
to the broader set of investment factors.9 The conclusions each earn 0.73.
In further (unreported) robustness analyses, we
9
All momentum variables are based on international equi- find that the majority of the performance of the factor
ties. However, because our data begin earlier than Ken French’s momentum strategy arises from dynamically adjusting
international five-factor data, we use the US Fama–French factors.

±
±
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±
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Exhibit 15
Comparison of Momentum Strategies (global ex. US)
Panel A: TSFM Relative Performance
14
12
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6
Annual %
–2
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E[R] α vs. UMD α vs. INDMOM α vs. STR α vs. CSFM
Panel B: CSFM Relative Performance

14
12
10
6
Annual %
–2
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–6
E[R] α vs. UMD α vs. INDMOM α vs. STR α vs. TSFM
1-1 1-3 1-6 1-12 1-36 1-60 2-12 13-60

Exhibit 16
Relative Performance of UMD, INDMOM, and STR (global ex. US)
Panel A: UMD
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Panel B: INDMOM
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Exhibit 17
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factor weights over time, rather than from taking static complementary with stock momentum, as both enter
long (short) bets on factors that have higher (lower) optimized multifactor portfolios with signif icant
average returns unconditionally. We also find that the positive weights (particularly when combined with
performance of factor momentum is not dependent on HML-Devil).
using dozens of fine-grained factors. Instead, with a set An interesting aspect of factor momentum is its
of only six broad theme factors,10 we reproduce the same stability with respect to the definition of recent per-
basic factor momentum phenomenon found in the 65 formance. Whether the look-back window is as short
factor dataset. as one month or as long as five years, our strategy
identifies large positive momentum among factors.
CONCLUSION This contrasts sharply with stock momentum, which
exhibits reversal with respect to recent one-month
We document robust persistence in the returns performance, momentum at intermediate horizons of
of equity factor portfolios. This persistence is exploit- around one year and again reversal for windows beyond
able with a time-series momentum trading strategy two years.
that scales factor exposures up and down in propor- Factor momentum is a truly global phenom-
tion to their recent performance. Factor timing in this enon. It manifests equally strongly outside the United
manner produces economically and statistically large States, both in a large global (excluding the United
excess performance relative to untimed factors. We States) sample and f iner Europe and Pacif ic region
aggregate individual factor timing strategies into a subsamples.
combined time-series factor momentum strategy that Taken alongside the evidence of time series
dominates all individual timing strategies. TSFM is momentum in commodity, bond, and currency factors
(Moskowitz, Ooi, and Pedersen 2012), our findings of
10 momentum among equity factors—in the time series,
The six theme factors are valuation, momentum, earnings
quality, sustainable growth, management, and risk. Each theme in the cross section, and around the world—support the
aggregates a set of closely related subfactors—for example, valuation conclusion that factor momentum is a pervasive phe-
includes book-to-market, earnings-to-price, and dividend yield. nomenon in financial markets.

Appendix
Exhibit A1
Factor List
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(continued)

Exhibit A1 (continued)
Factor List
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AR = The Accounting Review; BAR = The British Accounting Review; CFR = Critical Finance Review; CMBA = The Chicago MBA: A Journal
of Selected Papers; JAE = Journal of Accounting and Economics; JAR = Journal of Accounting Research; JF = The Journal of Finance; JFE = Journal
of Financial Economics; JFM = Journal of Financial Markets; JFQA = Journal of Financial and Quantitative Analysis; JFR = Journal of Financial
Research; ROF = Review of Finance; RFS = The Review of Financial Studies; WP = unpublished paper.
ACKNOWLEDGMENTS Asness, C., and A. Frazzini. 2013. “The Devil in HML’s

Details.” The Journal of Portfolio Management 39 (4): 49.
We thank Cliff Asness, Kobi Boudoukh, Andrea
Frazzini, Ronen Israel, and Toby Moskowitz for many helpful Asness, C., A. Frazzini, R. Israel, and T. Moskowitz. 2014.
suggestions throughout this project. We thank William Fu “Fact, Fiction, and Momentum Investing.” The Journal of Port-
for outstanding research assistance. folio Management 40 (5): 75.
REFERENCES Asness, C. S., J. A. Friedman, R. J. Krail, and J. M. Liew.

2000. “Style Timing: Value versus Growth.” The Journal of
Arnott, R. D., M. Clements, V. Kalesnik, and J. T. Portfolio Management 26 (3): 50–60.
Linnainmaa. “Factor Momentum.” Working paper, SSRN,
2018. Asness, C. S., T. J. Moskowitz, and L. H. Pedersen. 2013.
“Value and Momentum Everywhere.” The Journal of Finance
Asness, C. “Variables That Explain Stock Returns.” Ph.D. 68 (3): 929–985.
thesis, University of Chicago, 1994.
Asness, C. S., R. B. Porter, and R. L. Stevens. “Predicting
——. “My Factor Philippic.” Working paper, SSRN, 2016a. Stock Returns Using Industry-Relative Firm Characteris-
tics.” Working paper, SSRN, 2000.
——. 2016b. “The Siren Song of Factor Timing aka ‘Smart
Beta Timing’ aka ‘Style Timing.’” The Journal of Portfolio Avramov, D., S. Cheng, A. Schreiber, and K. Shemer. “Scaling
Management 42 (5): 1–6. Up Market Anomalies.” Working paper, 2016.

Chaves, D. B. 2016. “Idiosyncratic Momentum: US and Jegadeesh, N., and S. Titman. 1993. “Returns to Buying
International Evidence.” The Journal of Investing 25 (2): 64–76. Winners and Selling Losers: Implications for Stock Market
Efficiency.” The Journal of Finance 48 (1): 65–91.
Daniel, K., and T. J. Moskowitz. 2016. “Momentum Crashes.”
Journal of Financial Economics 122 (2): 221–247. Kelly, B., S. Pruitt, and Y. Su. “Characteristics Are Covari-
ances: A Unified Model of Risk and Return.” Discussion
De Bondt, W. F., and R. Thaler. 1985. “Does the Stock paper, National Bureau of Economic Research, 2018.
Market Overreact?” The Journal of Finance 40 (3): 793–805.
Lewellen, J. 2002. “Momentum and Autocorrelation in Stock

Fama, E. F., and K. R. French. 2016. “Dissecting Anomalies Returns.” The Review of Financial Studies 15 (2): 533–564.
with a Five-Factor Model.” The Review of Financial Studies
29 (1): 69–103. McLean, R. D., and J. Pontiff. 2016. “Does Academic
Research Destroy Stock Return Predictability?” The Journal
Frazzini, A., R. Israel, and T. Moskowitz. “Trading Costs of Finance 71 (1): 5–32.
of Asset Pricing Anomalies.” Working paper, AQR, 2015.
Moskowitz, T. J., and M. Grinblatt. 1999. “Do Indus-
Geczy, C. C., and M. Samonov. 2016. “Two Centuries of tries Explain Momentum?” The Journal of Finance 54 (4):
Price–Return Momentum.” Financial Analysts Journal 72 (5): 1249–1290.
32–56.
Moskowitz, T. J., Y. H. Ooi, and L. H. Pedersen. 2012. “Time-
Grundy, B. D., and J. S. M. Martin. 2001. “Understanding Series Momentum.” Journal of Financial Economics 104 (2):
the Nature of the Risks and the Source of the Rewards to 228–250.
Momentum Investing.” The Review of Financial Studies 14 (1):
29–78.
Disclaimer
Gu, S., B. T. Kelly, and D. Xiu. “Empirical Asset Pricing via AQR Capital Management is a global investment management firm, which
may or may not apply similar investment techniques or methods of analysis
Machine Learning.” Working paper, Yale, 2018.
as described herein. The views expressed here are those of the authors and
not necessarily those of AQR.
Harvey, C. R., Y. Liu, and H. Zhu. 2016. “... and the Cross-
Section of Expected Returns.” The Review of Financial Studies To order reprints of this article, please contact David Rowe at
29 (1): 5–68. d.rowe@pageantmedia.com or 646-891-2157.
Jegadeesh, N. 1990. “Evidence of Predictable Behavior of

Security Returns.” The Journal of Finance 45 (3): 881–898.

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REFERENCES Asness, C. S., J. A. Friedman, R. J. Krail, and J. M. Liew.

Quantitative Special Issue 2019 The Journal of Portfolio Management 23

Lewellen, J. 2002. “Momentum and Autocorrelation in Stock

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