Enhancing Momentum Strategies

Paul Calluzzo, Fabio Moneta, and Selim Topaloglu, authors of the April 2025 study “Momentum at Long Holding Periods” investigated a key aspect of how academic momentum strategies are typically constructed when forming a portfolio. Specifically, at the end of each month t−1, the standard 12-2 momentum strategy sorts stocks based on their cumulative returns from month t−12 to month t−2 and goes long stocks that are in the top decile and short stocks that are in the bottom decile. The researchers noted:

“The academic definition of momentum, which is constructed with a one-month lag [because stocks experience reversals at short horizons] can help infer which stocks will exhibit momentum in the future.”

They explained:

“We know today which stocks will be in the top and bottom deciles next month based on cumulative returns from month t−11 to month t−1. We can also reliably predict which stocks will be in the momentum portfolio beyond next month. For example, momentum rankings based on returns from month t−10 to month t−1, have a correlation of 0.94 with the momentum rankings in two months, and rankings based on returns from month t−6 to month t−1 have a correlation of 0.72 with the momentum rankings in six months.”

Using this information, their goal was to develop new portfolio rules that would allow investors to maintain strong momentum exposure over longer holding periods, while addressing some of the practical challenges faced by traditional momentum strategies – a hurdle to achieving the momentum returns documented in the literature is the extremely high portfolio turnover required to rebalance the long and short legs of the strategy.

Read the rest of my Alpha Architect article here.