Momentum without the Crash


Momentum strategies have given outsized returns in India. However, the naïve, monthly-rebalanced portfolios have punished investors with +50% drawdowns every 3-4 years. It is this crash risk that keeps most investors away from the momentum style of investing.

Risk management through stop-losses, hedging or tactical strategies are expensive. Investors either pay for them through higher transaction costs1 or in terms of “foregone” gains at turns.

A new paper, Decomposing Momentum: Eliminating its Crash Component2, claims to have found the magic elixir that banishes the left-tails off momentum.

Presenting: The High-To-Price (HTP) Momentum Strategy

We did a quick backtest of the strategy for Indian stocks and published it here.

Top 3 Positives

  1. It is a twist on the 52-week High momentum strategy. So, it is not all-together “new.” Easy to wrap your head around it.

  2. Assigns a score to each stock. This allows you to have cut-offs and portfolio weights based on it.

  3. Relatively fast in following the market around recoveries while retaining the ability to spend months sitting on cash for the market to become more conducive.

Top 3 Negatives

  1. Some of the stocks picked by the strategy went down 30% in a month, necessitating a more “dynamic” approach, pushing up costs.

  2. Some investors might find it difficult to wait for the strategy to catch-up in a recovering market. Especially, if they entered it right before a drawdown.

  3. Backtest aside, the jury is still out on the strategy’s ability to avoid crashes in Indian equities.

h/t Joachim Klement for digging this out.3