In this paper, the performance of systematic fundamental and momentum driven strategies in the US equity markets is analyzed. We evaluate the performance by backtesting long/short factor portfolios and compare them to an equal-weighted market portfolio. The backtest is implemented from 1997 to 2019 with a trading universe consisting of historical constituents in the Russell 3000 index.
We demonstrate that traditional value and momentum strategies have been a source of positive returns but are exposed to large drawdowns. However, these drawdowns can be mitigated by risk-adjusting the portfolios. It is shown that modern adaptions of the classical factor portfolios have superior performance. Momentum measures that control for factor exposures minimize the risk of momentum crashes. For value, the risk of value traps can also be reduced by controlling for the fundamental quality of the stocks. Moreover, the risk of the factor portfolios can be reduced by beta neutralizing the strategies and thereby further limiting the systematic risk ex-posure. Volatility managed portfolios are also introduced by leveraging the portfolios to a 10%risk target based on ex-ante volatility estimates. The scaling is shown to have diﬀerent impacts on the two factors. As the factor strategies have diﬀerent dynamics and returns distributions, the eﬀect of volatility scaling is positive for momentum and negative for value. However, both of the volatility targeted strategies produce better risk-adjusted returns than the basic strategies and the market portfolio in the backtests. Furthermore, the past performance of combined value and momentum portfolios is analyzed. The negative correlation between the strategies reduces the risk and drawdowns of the combined portfolio while maintaining high returns. Therefore combining value and momentum portfolios provides better risk-adjusted returns than the indi-vidual factors and the market portfolio.
The results of the paper verify that individual adaptions of value and momentum strategies have shown strong performance compared to the market in the past decades. Moreover, the performance can be enhanced by combining the strategies. This results in a portfolio with better risk-adjusted returns than the separate factors and is highly superior to market portfolios.
|Uddannelser||Cand.merc.fin Finance and Investments, (Kandidatuddannelse) Afsluttende afhandling|