01 Nov Learning From IMC's "The MOM-TOM Effect: Detecting The Market Impact Of CTA Trading"
To test for crowding effects of Absolute Momentum strategies employed by CTAs, the author explored and found significant returns for Absolute Momentum strategies during “turn of the month” days. The hypothesis is that during such days, CTAs would have to trade up their positions to put their new inflows to work in markets, temporarily pushing prices in their favour.
In this article, Absolute Momentum will be used interchangeably with trend following or time series momentum. Relative Momentum will be used interchangeably with cross-sectional momentum or relative strength.
The author found that 90% of cumulative returns, using Newedge Trend Index as a proxy for Absolute Momentum strategies, are being realised on 3 “turn of the month” days. Returns are greatest on the day before month end and two days after. Thereafter we see a reversal as shown in “Figure 3” in the paper (reproduced below). This is likely due to market impact following inflows according to the author.
Source: IMC Asset Management
Research Paper: The MOM-TOM effect: Detecting the market impact of CTA trading
Authors: Otto van Hemert
Company: IMC Asset Management