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Fund and Subportfolio Momentum

Last Updated on 10 February, 2024 by Rejaul Karim

Delving into the nuanced realm of investment strategy, Michael Christopher O’Connor brings forth a groundbreaking exploration in “Fund and Subportfolio Momentum.” In this 63-page journey, O’Connor challenges the conventional wisdom surrounding pure momentum strategies applied to individual stocks, shedding light on its vulnerabilities during market upheavals like the 2007-2008 Lehman Brothers/subprime crash.

However, O’Connor’s innovative approach introduces momentum to a dynamic portfolio of stock funds or stock-fund-like subportfolios, reshaping the narrative. The revelation of a simple resort-to-cash remedy for momentum failures during panics becomes a pivotal contribution. Through a meticulous walk-forward procedure, O’Connor not only simulates but adapts momentum strategies to the ever-evolving market landscape.

Unveiling the critical distinctions between optimal momentum measures for portfolios and individual stocks, this paper pioneers a transformative perspective, emphasizing adaptability and volatility suppression in navigating the complexities of investment dynamics.

Abstract Of Paper

The strategy of simply holding stocks of high momentum, high trailing returns, is amazing for the amount of support that it has gotten from normally skeptical academics. But in practice there have been flies in the ointment. Unhedged pure momentum didn’t help at all with the 2007–2008 Lehman Brothers/subprime crash and it would not have helped in 1929 either. Herein momentum is applied to a portfolio of stock funds or of stock-fund-like subportfolios, not stocks. And a simple resort-to-cash cure for momentum failures during panics is specified and tested using a new kind of “alpha” whose confidence interval is calculable despite the mixed-distribution character of the resultant portfolio returns. A walk-forward procedure is conducted that is more of a simulation than an abstract exercise in mathematical statistics, that provides a dynamically-optimized momentum strategy that would be adaptive to secular changes in the marketplace. That the optimal form of the momentum measure for a portfolio of funds or subportfolios is critically different from a popular form that works with stocks is demonstrated. And it is discovered that if volatility suppression is emphasized and there is a policy of resorting to cash when momentum falters then the optimal target number of funds or subportfolios to hold is a considerable fraction of the number of candidates.

Original paper – Download PDF

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Michael Christopher O’Connor
MO’C Portfolio Analytics


In summary, this study navigates the landscape of momentum strategies by extending the lens beyond individual stocks to encompass portfolios of stock funds or fund-like subportfolios. Acknowledging the historical limitations of unhedged pure momentum during market crises, the research proposes a pragmatic solution—resorting to cash during panics.

This innovative approach is scrutinized using a novel “alpha,” providing a confidence interval despite the mixed-distribution nature of portfolio returns. The walk-forward simulation not only optimizes the momentum strategy for adaptability to evolving market dynamics but also uncovers a critical departure from conventional stock-centric momentum measures.

Emphasizing volatility suppression and integrating a cash resort policy, the findings illuminate that the optimal target for the number of funds or subportfolios to hold significantly deviates from prevailing practices, contributing valuable insights for refining momentum strategies in the realm of stock funds.

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Q1: What is the main focus of Michael Christopher O’Connor’s paper, “Fund and Subportfolio Momentum”?

The paper explores and challenges the traditional application of pure momentum strategies to individual stocks by introducing a novel approach—applying momentum to a portfolio of stock funds or stock-fund-like subportfolios. It addresses the historical vulnerabilities of unhedged pure momentum during market crises and proposes a pragmatic solution involving a resort-to-cash strategy during panics.

Q2: How does the paper contribute to the adaptation of momentum strategies to market dynamics, and what is the key innovation proposed?

The paper employs a walk-forward procedure that simulates and adapts momentum strategies dynamically to changing market landscapes. The key innovation lies in introducing a resort-to-cash remedy for momentum failures during panics, supported by a novel “alpha” that provides a calculable confidence interval for portfolio returns despite their mixed-distribution nature.

Q3: What critical distinctions does the paper reveal between optimal momentum measures for portfolios and individual stocks?

The study demonstrates that the optimal form of the momentum measure for a portfolio of funds or subportfolios differs significantly from popular measures that work well with individual stocks. This finding underscores the importance of tailoring momentum strategies to the specific characteristics of portfolios, contributing to a nuanced understanding of their optimal implementation.

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