Momentum Investing: Evidence and Practical Application for Global Investors

Introduction

Momentum investing — buying securities that have outperformed recently and selling those that have underperformed — is one of the most thoroughly documented anomalies in financial markets. Unlike many purported market inefficiencies that disappear once discovered, momentum has persisted across geographies, asset classes and time periods for decades after its academic formalisation.

Yet momentum is also one of the most challenging factors to implement successfully. It is subject to sharp, sudden reversals. Its transaction costs are high. It requires disciplined, systematic execution that most individual investors find psychologically difficult to maintain. And it can produce extended periods of underperformance that test conviction.

This guide examines the evidence for momentum, explains its likely causes, and sets out how internationally mobile HNW investors can incorporate it into a portfolio in a way that captures the premium without being destroyed by its drawbacks.

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What Is Momentum?

In equity markets, momentum typically refers to the tendency of stocks that have performed well over the past 6–12 months to continue outperforming, and stocks that have performed poorly to continue underperforming, over the subsequent 3–12 months.

This is distinct from two related but separate phenomena:

• Short-term reversal (1-month): Very recent winners tend to reverse — likely due to market microstructure effects and liquidity demands.
• Long-term mean reversion (3–5 years): Very long-run losers tend to eventually outperform — likely reflecting the contrarian value effect.

The momentum effect sits in the 1–12 month window (typically measured using 12-month returns, excluding the most recent month to avoid short-term reversal).

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The Academic Evidence

Jegadeesh and Titman's 1993 paper, "Returns to Buying Winners and Selling Losers," was the first formal documentation of cross-sectional momentum in US equities. The effect has since been replicated:

• Across 40+ countries, including developed and emerging markets
• In bonds, currencies, commodities and real assets
• Across different time periods, including post-publication samples
• Within industries as well as at the individual stock level

Although Eugene Fama and Kenneth French did not add momentum to their own factor models (their 1993 model used market, size and value; their 2015 model added profitability and investment, not momentum), they acknowledged it as a robust anomaly their models could not explain — and Mark Carhart formalised it as the fourth factor in his 1997 four-factor model. As of 2026, momentum is widely recognised in academic finance as a genuine systematic premium.

Magnitude: The momentum premium in global equities has historically been in the range of 4–8% per annum in academic long-short implementations. However, implementation costs — transaction costs, market impact, short-selling costs — reduce this substantially in practice. Long-only momentum strategies (buying winners without shorting losers) typically capture 2–4% annual premium over simple market exposure.

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Why Does Momentum Exist?

Several explanations have been proposed:

Behavioural underreaction. Investors are slow to incorporate new information, meaning a positive earnings surprise or business improvement is only gradually reflected in the price, creating a drift period that momentum captures.

Herding and trend-following. Investor herding amplifies price trends — once an asset is rising, more investors pile in, extending the move beyond fundamental justification.

Disposition effect. Investors tend to sell winners too early (to lock in gains) and hold losers too long (to avoid realising losses), creating persistent underpricing of winners and overpricing of losers.

Risk-based explanations have been less successful. Momentum portfolios do not obviously load on traditional risk factors that should command a premium. The premium is more likely behavioural in origin.

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Momentum Crash Risk

The most significant practical risk of momentum investing is the momentum crash — a sudden, violent reversal of momentum factor returns that typically occurs in the early stages of a market recovery from a sharp decline.

The mechanism: in a market downturn, recent losers (which the momentum portfolio is short or underweights) become highly leveraged and volatile. When the market rebounds sharply, these extreme losers bounce violently, producing enormous losses for momentum long-short portfolios. The 2009 recovery from the global financial crisis produced one of history's worst momentum crashes, with some momentum strategies losing 30–50% in just a few months.

How to mitigate crash risk:

• Volatility scaling: Reduce momentum position sizes during periods of high market volatility. Some systematic managers dynamically scale exposure inversely to recent volatility.
• Avoid extreme leverage: Momentum returns deteriorate rapidly when leverage is applied aggressively during high-volatility regimes.
• Blend with other factors: Combining momentum with value (which tends to benefit from the same early-recovery period that kills momentum) reduces overall crash exposure.
• Use trend-following at the asset class level: Macro trend-following strategies, while different from cross-sectional equity momentum, provide diversification within a multi-factor framework.

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Practical Implementation

Long-Only Equity Momentum Funds

For most private investors, long-only momentum ETFs or active funds are the most practical approach. Several options are available to internationally mobile investors:

• iShares MSCI World Momentum Factor ETF (IWMO) — broad global developed market momentum, TER around 0.25% as of 2026
• SPDR MSCI USA Momentum ETF — US equity momentum focus
• Regional momentum ETFs across Europe, Japan and emerging markets from major providers

These funds typically rebalance quarterly or semi-annually, which reduces transaction costs and limits the extent to which they can fully capture the short-horizon momentum premium, but provides a reasonable approximation at low cost.

Systematic Quantitative Funds

For HNW investors seeking more complete momentum exposure — including long-short implementations and cross-asset momentum — dedicated systematic quantitative managers may be appropriate. Managers in the CTA (Commodity Trading Adviser) and quant equity space offer:

• Cross-asset trend following (futures-based, capturing momentum in equities, bonds, currencies and commodities simultaneously)
• Long-short equity momentum within a broader multi-factor quant equity fund
• Dedicated factor strategies through managed accounts at scale

Access to the best systematic managers has historically required minimum commitments of £1m–£5m and is typically available only to sophisticated investors or through discretionary mandate structures.

Incorporating Momentum in a Multi-Factor Portfolio

The most robust use of momentum is as a complement to value within a multi-factor equity allocation. Value and momentum have a historically low or negative correlation with each other: the periods when value underperforms (growth-dominated bull markets) often coincide with strong momentum performance, and vice versa. A portfolio holding both factors simultaneously captures diversification benefits and reduces the severity of the factor-specific drawdowns each experiences in isolation.

A practical allocation might dedicate 40% of the equity factor budget to value, 30% to momentum, and 30% to quality — with explicit rules for rebalancing back to these weights when factor performance diverges.

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Momentum Across Asset Classes

Momentum is not limited to equities. The same tendency for recent outperformance to persist short-term has been documented in:

• Fixed income: Bonds that have recently performed well tend to continue outperforming, particularly across different maturities and credit qualities.
• Currencies: Currencies trending upward tend to continue rising for weeks to months — the basis for many carry-and-trend FX strategies.
• Commodities: Commodity momentum is well-documented, particularly at the individual commodity level.
• REITs and listed infrastructure: Real assets exhibit momentum effects similar to equities.

This cross-asset pervasiveness is one reason trend-following CTAs — which systematically trade momentum across all liquid futures markets — have historically provided genuine diversification to equity-heavy portfolios, particularly during extended equity bear markets.

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Tax Considerations

Momentum strategies have higher portfolio turnover than buy-and-hold approaches, generating more frequent capital events. In taxable accounts, this turnover has real after-tax cost. Solutions:

• Implement momentum exposure via tax-efficient vehicles (ISA, SIPP, offshore investment bond) where gains roll up free of tax.
• For taxable accounts, prefer tax-managed momentum fund structures that attempt to defer and minimise taxable realisations.
• In some jurisdictions, the momentum premium is large enough to justify its tax cost even in taxable accounts, but quantify this before committing.

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How Global Investments Can Help

Global Investments incorporates systematic factor exposures — including momentum — within our multi-asset and equity portfolio construction for qualifying clients. Our investment team monitors factor valuations, cross-factor correlations and market volatility regimes to manage the specific risks of momentum exposure, including crash risk mitigation.

We can assess whether adding explicit momentum exposure to your existing portfolio is likely to improve risk-adjusted returns, and implement that exposure in the most tax-efficient structure for your domicile and circumstances.

Contact our investment team to discuss factor-based portfolio construction.

Capital is at risk. The value of investments can fall as well as rise. Momentum strategies can suffer sudden, severe drawdowns, particularly in sharp market recoveries. Past performance of any factor is not a reliable guide to future returns. This guide is for information only and does not constitute personalised investment advice.