One thing I've noticed when combining value and momentum is that the factor loadings tend to offset each other. A deep value fund like BOSVX has a fairly substantial negative MOM loading (despite their MOM screens). DFSVX has done a better job reducing it. A fund like AMOMX has a fairly large negative value loading.

When you combine them in say a 50/50 allocation you are left with a basket of stocks with small loadings to each factor.

Assuming you have been convinced of MOM's persistance, I have a couple of questions. Since these would be two separate funds can you think of them as two separate "asset classes" and expect to receive a rebalancing bonus? Or is it right like I said above to think of it as owning a basket of stocks between two funds. Also, in the scenario you presented above did you notice you had better risk adjusted returns by adding MOM? You seem to talk about adding MOM as a way to reduce tracking error meaning if you ate ok with tracking error you don't need it. I. Your research have you been convinced adding MOM adds other benefits?

Thanks for the question...it's a great one.

First, if you look at four-factor regressions of daily return data of BOSVX and DFSVX since BOSVX's inception and through 6/2012 the MOM loadings have been -0.08 for BOSVX and DFSVX has been at 0.02. So DFA has been slightly positive on MOM over that period and BOSVX slightly negative but definitely not deeply negative.

One caveat to the above is that the momentum loadings on both of these strategies go negative if you back out the negative momentum embedded in the HML factor and then re-run the regression. If you want to see an example of this let me know...it's pretty interesting.

Second, don't agree with your observation re: AMOMX whether you are looking at live or index data. Using live data the HML loading has been +0.03 so basically zero and using their index data the HML loading has been -0.07 (all these analyses are through 6/2012 and use monthly data).

So by combining the two you don't get an offsetting result.

I'll have to get back to you on risk-adjusted returns. I don't have that info right in front of me. I suspect the answer is yes but let me confirm.

Thanks for the reply.

For AMOMX I used the monthly data off their website and factors off Ken French's web site. I used excel for the regression. For BOSVX I used yahoo so that could be suspect data. I'm glad you got different results because from what I saw combining HML and WML sort of cancelled each other out.

Don't have the data in front of me but I thought AMOMX the HML was like -.2 and WML was +.3. I'll have to check again.

Another question I have is if I'm right (which doesn't sound like its true) is a .3 loading about all we can expect from a MOM fund.

I would like to see what it looks like when you back out the negative momentum in HML. I've never heard that before.

BTW Built to Spill is One of my favorite bands of all time. How they never blew up is beyond me. The Perfect From Now On album will change your life (thick hippe accent)

I just re-ran my AMOMX Index and live fund return numbers from scratch just to make sure they were right.

For the index series over the period of 1/1980-6/2012 and using Ken French's research factors plus momentum I come up with:

MKT  1.10
SMB -0.03
HML -0.07
MOM  0.37

For the live fund over the period of 8/2009-6/2012 I come up with:

MKT  1.05
SMB  0.04
HML  0.03
MOM 0.34

All the AQR data is taken from their website. So this shows that there's not the degree of growth bias that you might think, indicating that momentum is a distinctly different strategy from a growth strategy.

I do think you are right on where loadings for AQR's long-only strategies shake out. I doubt you'll see them go much above a 0.30 to 0.40 from what I've seen but that's still significant exposure.

As another side note so far they've tracked the index pretty closely at about 1.5 percent annualized tracking error and actually outperformed the index by about 7 bps/month net of management fees.

I got to see Built to Spill about a year or so ago here in STL at the Pageant...absolutely great show.

JK

So back to the other thing I'd mentioned on the relationship b/w HML and MOM.

If you run the following regression using Ken's data - HML regressed on UMD - you find that HML has about a -0.30 loading on UMD. This means that HML itself is really a combination of "true" value + negative momentum. It's even worse if you do the same analysis using the benchmark factors, meaning the momentum loading is even more negative. This is one of the reasons why the returns of the HML research factor have been higher than the returns of the HML benchmark factor.

Interesting...It really shows the value of the momentum screens that those funds use.

I guess I can do it myself but does it work the other way where MOM has a negative value loading?

All we need now is one fund that has a high loading on all four factors. Maybe even a cheap passive arbitrage fund and a carry trade fund. We could all be our own little hedge funds. Of course the difference is we would make ourselves money.