“The premier anomaly is momentum.” – Eugene Fama and Kenneth French

There is momentum in theory and there is momentum in practice. Momentum in theory is the premier market anomaly. Momentum in practice is a bit more complicated.

What is the look-back period (3 months, 6 months, 12 months, etc.)?

What is the rebalance frequency (monthly, quarterly, etc.)?

What is the universe (S&P 500, Russell 1000, Russell 2000, Russell 3000, etc.)?

What is the style (long-only or long-short)?

What are the number of holdings (what % of stocks (top 10%, 20%, etc.) are you using to define “momentum”)?

What are the weighting rules (market cap, equal, volatility, etc.)?

What is the expense ratio?

What are the trading costs?

What are the tax implications?

Few know to ask such questions. Fewer still would know what to do with the answers if they had them.

To illustrate, let’s take a look at one of the more popular momentum products in the marketplace: the AQR Large Cap Momentum Style Fund (AMOMX). Launched in July 2009 by AQR, the fund offers “systematic exposure to stocks with positive momentum.”

What does that mean in plain English?

AQR ranks the largest 1,000 U.S. stocks by their prior 12-month total return and selects the top 33% of stocks with the highest rankings. Next, they weight the selected stocks by market cap with a “tilt” to “higher momentum stocks.” Once every quarter, they repeat this procedure and rebalance the portfolio.

That leaves us with some of idea of what they are doing, but how can we be sure that what they are doing is the best way of doing it?

We can’t.

The academic research on momentum provides considerable leeway in terms of how to actually execute on the idea that “buying past winners and selling past losers” is an alpha-generating strategy.

In this particular fund, AQR’s choice of style (long-only), universe (largest 1,000 stocks), look-back period (12 months), rebalancing (quarterly), and weighting (market cap with a “tilt”) is one variation among many. It may be a better or worse variation than the others but one can only know that in hindsight.

But AQR manages $175 billion in assets and over $900 million in this fund alone. Isn’t that proof that they know the best variation?