A Factor Timing Sleeve From Studying Momentum

Introduction

The standard story about momentum may be wrong.

We treat it as a separate source of return, something orthogonal to value, size, quality, and the rest. To construct the momentum factor, we typically build Up Minus Down (UMD) factors, stuff them into our models, and move on.

Here’s the thing: momentum’s correlation with other factors is nearly zero only because the loadings keep flipping signs. When value did well last year, momentum is long value. When value did poorly, momentum is short value. The unconditional correlation washes out to nothing. That doesn’t mean momentum is unrelated to other factors. It means momentum is a timing strategy on other factors.