Understanding the Momentum Risk Premium:An In-Depth Journey Through Trend-Following Strategies, Jusselin, et al. September 2017. 102 pages. SSRN
From the concluding remarks: "The momentum risk premium has been extensively documented by academics and professionals. There is no doubt that momentum strategies have posted impressive (real or simulated) past performance. There is no doubt that asset owners and asset managers widely use momentum strategies in their portfolios. There is also no doubt that the momentum risk factor explains part of the performance of assets. With the emergence of alternative risk premia, momentum is now under the scrutiny of sophisticated institutional investors, in particular pension funds and sovereign wealth funds. Therefore, Roncalli (2017) supports the view that carry and momentum are the most relevant alternative risk premia since they are present across different asset classes, and must be included in a strategic asset allocation. Nevertheless, the development of alternative risk premia has some big impacts on portfolio construction, because the relationships between these strategies are non-linear. In this case, the traditional diversification approach based on correlations must be supplemented by a payoff approach. However, most risk premia have a concave payoff. The momentum risk premium thus plays a central role as it exhibits a convex payoff, and we know that mixing concave and convex strategies is key for managing skewness risk in bad times. Sophisticated institutional investors need to profoundly understand these new risk premia in order to allocate them in an optimal way."
From the Abstract: "Momentum risk premium is one of the most important alternative risk premia. Since it is considered a market anomaly, it is not always well understood. Many publications on this topic are therefore based on backtesting and empirical results. However, some academic studies have developed a theoretical framework that allows us to understand the behavior of such strategies. In this paper, we extend the model of Bruder and Gaussel (2011) to the multivariate case. We can find the main properties found in academic literature, and obtain new theoretical findings on the momentum risk premium. In particular, we revisit the payoff of trend-following strategies, and analyze the impact of the asset universe on the risk/return profile. We also compare empirical stylized facts with the theoretical results obtained from our model. Finally, we study the hedging properties of trend-following strategies."
Random Quote: "In fact, we think that there is a misconception about CTAs. Many people think that CTAs are good strategies for hedging the skewness risk of the stock market. In reality, trend-following strategies help to hedge drawdowns due to volatility risk. For instance, CTAs did a very good job in 2008, because the Global Financial Crisis is more a high volatility event than a pure event of skewness risk. However, it is not obvious that CTAs may post similar performances when facing skewness events. For instance, the performance of CTAs was disappointing during the Eurozone crisis in 2011 and the Swiss CHF chaos in January 2015. "
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Most of the paper is over my head but it was still worth reading the few parts I could understand.
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