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A Fund for Greed and Fear

This momentum fund, while not without risk, offers value investors a diversifying alternative strategy.


Alex Bryan: Momentum is based on the premise that assets that have recently outperformed will continue to do so in the short term, and that those that have recently lagged will continue to underperform. It may occur because investors may underreact to new information and pile in to a trade after a trend has been established. This phenomenon has been observed in most markets studied and over most time horizons. And it has tended to work well when value investing hasn't and vice versa. As a result, value-oriented investors may capture good diversification benefits by adding a momentum strategy to their portfolios.

AQR Momentum offers one of the best ways to take advantage of this phenomenon. It targets the one third of the U.S. large-cap market with the best performance over the most recent year, excluding the most recent month, and that's consistent with the way the academic researchers have measured momentum. It also weights its holdings using a combination of market capitalization and relative momentum, and that tilts the portfolio toward the growth side of the Morningstar Style Box but also causes the fund to overweight some of the smaller names relative to its peers.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.