Thursday, October 30, 2025

Is it always about momentum but need style/factor diversification

 


There is a bandwagon effect with the momentum factor. The momentum factor performance is closely associated with cumulative flows into an asset or asset class. Still, these strategies do not last forever, which is why an investor should diversify their sources of alpha.

The simple case is to match the fundamental and systematic components to achieve a smoother blended return. 

Money flows and market behavior will change, and it is hard to find these turning points, so the first pass for effective factor management is to use more than one factor and ensure they show natural low correlation.


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