Stocks that have significantly increased in value in the recent past (absolute strength winners) continue to gain, and stocks that have significantly decreased in value (absolute strength losers) continue to lose in the near future. Absolute strength momentum does not expose investors to severe crashes during crisis periods, and its profits are remarkably consistent over time. We uncover similar results when we vary the sorting period for cumulative returns between 3 and 12 months.
Composite of long/short premia, including Absolute and Relative Momentum performs well when Equities or Bonds perform poorly. Absolute Momentum is a good complement with Private Equity with negative correlation.
Correlation among CTAs is generally high but this correlation becomes weaker when there are opportunities to capture momentum premiums. The dispersion in performance widens when correlation breaks down.
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.
For more than 100 years since 1880, Absolute Momentum strategy has delivered consistent and positive returns with low correlation to traditional asset classes each decade. This is an update to the original Fall 2012 paper due to availability of additional historical data which allowed AQR to extend the research to 1880 and increase the number of assets from 59 to 67.