Using Style Index Momentum to Generate Alpha

Abstract

Russell style indexes exhibit significant momentum, particularly after medium term out- and underperformance. The existence of this momentum produces a diversified, index-based low-cost means to exploit momentum by incorporating relative style index performance into tactical allocation strategies. Such style index momentum trading strategies have outperformed on both a raw and risk-adjusted return basis, with the long minus short portfolio generating an average 9.25% annual return over the 34-year period analyzed. Although the excess returns vary, they are robust through time and after controlling for potentially confounding effects. Additionally, the returns are not driven by any single style index and portfolio reconstruction is, on average, required every six months.

Keywords: Momentum, Style Investing

JEL Classification: G14