Performance of 52 Week Momentum in Factor Analysis
Earlier I looked at PE ratios as a factor (here). Another well known and simple factor supported by academic research is to buy companies that have performed the best over the last 52 weeks or as part of a long/short strategy.
I performed a factor backtest on 52 week total returns using the parameters below and took a closer look at the statistical properties of the strategy.
Period of Test: 1999-01-02 to 2013-12-31
Re-balancing Frequency: Monthly
Ranking Method: Percentile into 5 buckets (0 to 20% (Lowest 52 week return), 20% to 40%, etc)
Stock Universe: Russell 3000
Factor: Trailing 52 Week Returns
Additionally, the long/short strategy is created by going long the stocks with highest 52 week returns (80 to 100) and going short the lowest 52 week returns (0 to 20).
Annualized Return Statistics
As expected, overall the top quantile of companies continued to outperform (12.05% annualized vs 3.21% annualized for the Russell 3000). Surprisingly, the overall long/short strategy did not perform very well as it’s performance was very weak coming off the market bottoms in 2003 and 2009, eliminating any positive returns generated in other years.
|Strategy||Annualized Return||Annualized Std Dev||Annualized Sharpe (Rf=0%)|
|0 to 20||1.47||39.11||0.0376|
|20 to 40||7.77||25.38||0.3063|
|40 to 60||9.39||19.51||0.4813|
|60 to 80||10.58||18.02||0.5869|
|80 to 100||12.05||23.65||0.5093|
On a cumulative and rolling basis the top performers outperform other quantile’s but the weakest quantile outperforms significantly coming off the bottoms of a bear market. This weak quantile out-performance post bear market can lead to a very poor period for a 52 week return long/short strategy.
Relative Performance Statistics
Where the long/short strategy does outperform is during a market downturn, as seen in strong performances by the strategy from 2000 to 2003 and 2008.
|Risk Metric||0 to 20 to Russell 3000||20 to 40 to Russell 3000||40 to 60 to Russell 3000||60 to 80 to Russell 3000||80 to 100 to Russell 3000||Long/Short to Russell 3000|
|Annualized Alpha (%)||0.0300||4.7500||6.3300||7.5300||9.2300||9.2100|
This table shows the correlations of each of the strategies to the Russell 3000, including there p-value and confidence intervals. The long/short strategy shows a statistically significant negative return to the overall Russell 3000.
|Strategy||Correlation||p-value||Lower CI||Upper CI|
|0 to 20 to Russell||0.84||0||0.79||0.88|
|20 to 40 to Russell||0.90||0||0.87||0.92|
|40 to 60 to Russell||0.92||0||0.90||0.94|
|60 to 80 to Russell||0.93||0||0.90||0.94|
|80 to 100 to Russell||0.86||0||0.81||0.89|
|Long/Short to Russell||-0.44||0||-0.55||-0.32|
Risk Metrics Statistics
The long/short strategy exhibits a long negative tail of monthly returns.
Looking at the overall risk metrics for the various strategies the 60 to 80% quantile shows the least volatile monthly returns. While again the long/short strategy has significant downside and max drawdown risk characteristics due to it’s performance in 2003 and 2009.
|Risk Metric||Russell 3000||0 to 20||20 to 40||40 to 60||60 to 80||80 to 100||Long/Short|
|Downside Deviation (MAR=10%)||4.16||7.53||5.22||4.20||3.97||5.07||6.95|
|Downside Deviation (Rf=0%)||3.75||7.11||4.83||3.83||3.60||4.69||6.65|
|Downside Deviation (0%)||3.75||7.11||4.83||3.83||3.60||4.69||6.65|
|Historical VaR (95%)||-8.38||-16.66||-9.49||-7.31||-8.01||-10.70||-12.53|
|Historical ES (95%)||-12.19||-22.49||-15.43||-12.24||-11.57||-15.44||-24.74|
|Modified VaR (95%)||-8.78||-14.25||-10.82||-8.92||-8.51||-11.14||-15.74|
|Modified ES (95%)||-14.91||-14.83||-19.11||-19.67||-16.95||-17.42||-34.98|
- Overall, those companies which performed the best over the last year are likely to continue to outperform over the next month.
- During a market correction a long/short strategy based on 1 year returns is negatively correlated to the market, providing a hedge and will likely outperform.
- As you come out of a bear market, the best performers in the previous year will under-perform (significantly in ‘09 case) those that performed the weakest. Additionally, continuing to allocate capital to a long/short 1 year return strategy immediately following a bear market can be very damaging to your portfolio.