Why (I Think) Momentum ‘Works’

And by ‘works’, I mean Cliff Asness’s ‘works’:

Here is Cliff Asness’s latest piece with Antti Ilmanen and Thomas Maloney on market timing (hat tip Barry Ritholtz).


This is my previous post in September on market timing; “A Practitioner’s Defense of Return Predictability“:

In this paper, they attempt to combine a vast array of ideas rather than focusing on one small marginal addition to the literature which, in my opinion, is one of the secret ingredients of quant investing. A single inefficiency might not be enough to convince the believers of market efficiency, but a combination of several insights can form a reliable trading strategy.

‘Combination’ is the key word here, in fact, in the conclusion:

Such an exercise will readily illustrate the importance of combining information in different return predictors. Another interesting extension is to examine alternate methods of combining forecasting variables.


Having lived through two 50% plus peak to trough draw-downs in the past fifteen years, one should challenge the buy and hold mentality. The proponents of buy and hold may dismiss all efforts to time the market, saying it can’t be done, which this study disproves to some degree.

As our understanding of return predictability changes, so will the stigma associated with market-timing strategies. Anybody who claimed to implement a “market-timing” strategy in the past 30 years would have been considered irresponsible; as such a strategy was thought to underperform the buy-and-hold strategy. In the upcoming 30 years, it is likely that it will be considered irresponsible to not engage in informed market-timing. Investors should change their asset allocation as estimates for expected returns change, in order to maximize the longrun growth rate of their investment. In doing so, financial markets become more stable and less volatile.

Why ‘works’?


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