Cliff Asness has taken on Eugene Fama over his beliefs on momentum investing.
“If momentum is truly so risky, doesn’t that make you believe in it much more?”The AQR founder used his latest blog post to respond to Fama’s remarks on the momentum strategy at the Fiduciary Investors Symposium in Chicago.
In an on-stage interview, Fama said the high turnover associated with momentum trading makes it implausible that higher average returns can be explained by risk.
“I have difficulty thinking about a risk factor with a turnover so high, where the risks of the stocks change so dramatically, so quickly,” Fama said.
Asness responded that turnover is less relevant to understanding risk than how returns behave. As Fama himself noted, momentum “tends to blow up now and then”—implying, Asness argued, that returns are driven by risk, after all.
“If momentum is truly so risky, doesn’t that make you believe in it much more?” Asness asked.
Asness said he personally does not believe momentum’s success is rational compensation for risk so much as the result of irrational behavior and investor biases showing up in prices. This goes directly against Fama’s efficient markets hypothesis, which argues that stocks always trade at their fair value.
“Momentum, in my view, is the biggest embarrassment for efficient markets,” Fama said, admitting that he was “hoping it goes away.”
Fama further argued momentum has never worked in Japan—“Japan has been more rational than that rest of us,” he said.
But Asness said that when value is factored in, the results in Japan are “either supportive of, are no real blow to, the evidence in favor of the momentum factor.”
“Given that momentum works pretty much—what’s the word I’m looking for?—near everywhere, citing its worst showing among so many markets seems exceptionally weak tea,” Asness wrote.
The debate as to whether momentum exists and whether it can be captured “should be put to bed at this point,” said Asness, arguing that it is “easily and obviously” a factor any investor should include in their portfolio.
“If you have only a five-factor model without it, you have little excuse not to switch to a six-factor model with it,” he concluded.