Of all the factors that academic finance has identified, momentum is arguably both the most counterintuitive and the most robustly documented. The basic finding — that securities which have performed well over the recent past tend, on average, to continue performing well over the near term — sits uncomfortably with the efficient market hypothesis, and yet the evidence for it is extraordinarily consistent across time periods, asset classes and geographies. For HNW investors with internationally diversified portfolios, understanding momentum's mechanics, its costs and its failure modes is essential — whether as a standalone strategy, a tilt within a broader factor allocation, or simply as a framework for thinking about portfolio behaviour.
Capital is at risk. Past performance is not a reliable indicator of future results. This guide is for information purposes only and does not constitute regulated investment advice.
What Is Momentum?
Momentum is the tendency for assets that have recently risen in price to continue rising, and for assets that have recently fallen to continue falling, over horizons typically measured in months rather than years.
The canonical implementation looks at returns over the past 12 months, excluding the most recent month (to avoid short-term reversal contamination), and ranks securities accordingly. The top-performing decile or quintile is labelled the "winner" portfolio; the bottom is the "loser" portfolio. Long-term evidence shows the winner portfolio consistently outperforms the loser portfolio — often by 5–10 percentage points per annum in academic studies, though real-world implementation after costs and taxes is substantially lower.
Cross-sectional momentum (as described above) involves buying winners relative to their peers. Time-series momentum (or absolute momentum) involves buying an asset when it has risen above its own historical average, and moving to cash or bonds when it has fallen below — regardless of peer performance.
Both approaches have documented evidence. Time-series momentum is particularly associated with trend-following strategies used by managed futures funds and commodity trading advisors.
The Academic Evidence
Jegadeesh and Titman's landmark 1993 paper showed that US equities exhibited momentum over 3–12 month horizons. Subsequent research confirmed the pattern across:
- UK and European equities (Rouwenhorst, 1998)
- International equity markets including Japan, Australia and emerging markets
- Fixed income markets (government bonds, credit)
- Commodities (metals, energy, agricultural)
- Currencies (systematic FX trend following)
The breadth of evidence — across so many independent markets and asset classes — is what gives momentum its credibility. Unlike some factors whose evidence thins once you look outside the original data set, momentum appears almost universally.
Why Does Momentum Exist?
Academic debate about the source of momentum returns is ongoing. Leading explanations include:
Behavioural explanations (underreaction then overreaction): Investors initially underreact to new information, causing prices to drift upward gradually rather than jumping immediately. Later, herding and trend-chasing cause prices to overshoot, before eventually mean-reverting. This creates the medium-term momentum pattern and the long-term reversal documented over 3–5 year horizons.
Risk-based explanations: Some argue momentum represents compensation for a genuine risk — for instance, that winner stocks are exposed to recession risk (they may be economically sensitive companies riding a growth cycle that will eventually end). This is contested.
Liquidity and information flow: In less informationally efficient markets, momentum may persist longer because new information diffuses more slowly through the investor base.
For practical purposes, the source matters less than the evidence of persistence — though it affects how you think about the strategy's risk of sudden failure.
Momentum's Notorious Failure Mode: The Momentum Crash
Momentum is one of the few documented risk premia with a recognised and severe failure mode: the momentum crash.
Momentum crashes tend to occur when markets reverse sharply after a sustained trend. The classic example is March–April 2009, when global equity markets bottomed out after the financial crisis and began a sharp recovery. Momentum portfolios at that point were long the recent winners — which included defensives, healthcare and utilities — and short the recent losers, which included beaten-down financials and cyclicals. When cyclicals and financials led the recovery, momentum strategies incurred catastrophic short-term losses, with some pure momentum implementations losing 50–70% in weeks.
Similar (if less severe) crashes occurred at the COVID-19 market reversal in March–April 2020 and the style rotation from growth to value in 2022.
Implication for investors: pure momentum should not be held as a standalone strategy without either:
- Crash protection mechanisms (e.g., combining with trend signals, reducing exposure in high-volatility environments)
- A portfolio context where momentum is a tilt alongside other diversifying factors
- Long enough horizons and risk tolerance to absorb the occasional sharp drawdown
Momentum Across Global Markets
The momentum premium varies by market:
US equities: The deepest, most liquid application. Momentum ETFs from iShares (MTUM), Invesco and others provide low-cost access. Turnover is high (typical portfolio holds for 3–6 months), generating significant transaction costs and potential tax events.
European equities: Momentum is well-documented in European markets. UCITS momentum funds are available, typically rebalancing quarterly or semi-annually.
Japanese equities: Momentum has historically been weaker in Japan, possibly linked to the greater role of keiretsu structures, lower information efficiency and different investor behaviour.
Emerging markets: Momentum exists in aggregate EM data but implementation is complicated by liquidity constraints, higher transaction costs, corporate governance variability and capital controls in some markets.
Frontier markets: Evidence is limited due to data quality, but the slower information diffusion characteristic of frontier markets suggests momentum effects may persist for longer.
Implementing Momentum in a Real Portfolio
Via Dedicated Factor ETFs and Funds
The most straightforward implementation for most HNW investors. Key considerations:
- Rebalancing frequency: More frequent rebalancing captures the factor better but generates higher turnover and costs.
- Sector neutrality: Some funds constrain sector weightings to avoid being purely long technology or energy at sector inflection points; others are unconstrained.
- Price to quality: Combining momentum with quality (profitability) screens reduces crash risk by avoiding deeply speculative momentum winners.
- UCITS domicile: For internationally mobile investors, Ireland-domiciled UCITS momentum ETFs offer broad distributional reach.
Via Active Managers with Systematic Processes
A number of systematic equity managers incorporate momentum signals into their stock selection process alongside other factors. Multi-factor models blending momentum, quality, value and low volatility have shown more consistent real-world risk-adjusted returns than pure momentum, because the factors tend to diversify each other's drawdown periods.
Via Managed Futures / Trend-Following Funds
For exposure to cross-asset momentum (equities, bonds, currencies, commodities), trend-following managed futures funds — the Winton, Man AHL, Aspect or Systematica brands being among the best-known institutional providers — apply momentum logic across multiple asset classes. These can act as portfolio diversifiers, performing strongly in sustained directional markets (including sustained downtrends) while providing crisis alpha in some environments.
Access to institutional-quality managed futures funds typically requires minimum investments of £250,000 or more and may be restricted to professional or sophisticated investors.
Combining Momentum with Other Factors
The strongest case for momentum in a portfolio context is as a complement to value:
- Value and momentum are negatively correlated: value tends to perform when momentum is struggling (value recoveries often begin precisely when momentum portfolios are most extended in the wrong direction) and vice versa
- A 50/50 value-momentum blend has historically produced a Sharpe ratio superior to either factor in isolation in US, European and international data
- Adding quality as a third factor further reduces crash risk
This multi-factor logic is now mainstream in systematic equity management. The practical question is whether to implement it via a single multi-factor fund or by combining separate value, momentum and quality building blocks.
Tax Considerations
Momentum strategies generate substantial turnover — a pure momentum fund may turn over 50–150% of its portfolio annually. In tax jurisdictions where capital gains are taxed at realisation, this creates frequent taxable events. For investors in zero-capital-gains environments (UAE, Cayman Islands), this matters less. For UK-resident investors, annual CGT allowances and ISA/SIPP wrappers should be used where possible. For other internationally mobile investors, the structure of the holding vehicle is critical.
Realistic Expectations
In academic studies, the momentum premium (gross) has been estimated at 5–10% per annum in US equities. After realistic transaction costs, management fees, market impact and taxes, net outperformance versus the market is likely 2–4% for well-implemented strategies in normal conditions — and potentially deeply negative during momentum crashes.
Investors should hold momentum as part of a diversified factor portfolio and expect:
- Multi-year periods of underperformance relative to a simple market index
- Occasional sharp drawdowns of 30–50% during market reversals
- Long-run potential for above-market returns if held with discipline through the cycle
How Global Investments Can Help
Global Investments works with international clients to incorporate momentum and multi-factor tilts into globally diversified equity mandates. Our portfolio construction process blends momentum, quality, value and low-volatility signals to reduce the vulnerability to momentum crashes while preserving the factor's long-run potential.
We identify appropriate UCITS fund vehicles, assess tax implications across jurisdictions and build portfolios that integrate factor tilts within a broader asset allocation framework. For clients who meet the eligibility criteria, we can also facilitate access to institutional managed futures and systematic macro strategies that apply momentum across multiple asset classes.
Contact our team to discuss how systematic factor investing might enhance your international portfolio.
Investments can fall as well as rise. Factor premiums are not guaranteed. Tax rules vary by jurisdiction. This guide does not constitute regulated investment advice.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to future returns. Tax rules, investment regulations, and the availability of specific investment vehicles change — always verify current rules and seek advice from a qualified independent financial adviser before making any investment decisions.