![]() ![]() It assumes that the current winners will continue to outperform the current losers in the future… building a portfolio that is long on assets that have outperformed and short on assets that have underperformed…The net exposure of a cross-section momentum is equal to zero…The cross-section momentum strategy is one of the pillars when a fund manager builds an equity multi-factor portfolio by mixing size, value, momentum, low risk and quality stocks.” A cross-section momentum is called a winners-minus-losers strategy.The time-series momentum is called…trend-following strategy…because it assumes that assets with a current positive trend will continue to have a future positive trend and assets with a current negative trend will continue to have a future negative trend…The portfolio is long on assets with a positive past trend and short on assets with a negative past trend… The time-series momentum strategy is intensively used by CTAs with a multi-asset universe and is generally implemented with equity, bond, currency and commodity futures contracts. ![]() “We have to make the distinction between two generic strategies: time-series and cross-section… “The idea of alternative risk premia is to group individual securities in another way in order to define new risk factors…to build a better diversified portfolio than a traditional stock-bond asset mix policy… Carry and momentum are the most relevant alternative risk premia since they are present across different asset classes…Momentum is one of the oldest and most popular trading strategies… risk premium strategies assume that the past trend is a predictor of the future trend.” Emphasis and cursive text have been added. The post ties in with SRSV’s lecture on setback risk. Roncalli, Thierry (2017), “Keep Up The Momentum”, December 2017 The main pitfalls of both momentum strategies are jump events and high costs of ‘gamma trading’ conjoined with high leverage. By contrast, cross section momentum strategies benefit from high absolute correlation of underlying contracts and are more suitable for trading assets of a homogeneous class. It works best if the underlying assets earn high absolute (positive or negative) Sharpe ratios and display low correlation. Trend following is a market directional strategy that promises ‘convex beta’ and ‘good diversification’ for outright long and carry portfolios as it normally performs well in protracted good and bad times alike. Time series momentum motivates trend following cross section momentum gives rise to ‘winners-minus-losers strategies’. Systematic momentum trading is a major alternative risk premium strategy across asset classes.
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