Risk-Managed Momentum: The Effect of Leverage Constraints

Abstract

Risk-managed momentum allows investors to increase the Sharpe ratio of the momentum strategy and to reduce momentum crashes. Yet, the improvement in the performance comes at the price of often assuming a levered position on plain momentum. I show that leverage-constrained investors benefit from a risk-managed momentum strategy that scales the momentum exposure with the past realized positive semi-variance of momentum returns rather than with the past realized variance.

Keywords: Momentum, Variance Decomposition, Performance

JEL Classification: C58, G11, G12, G17