Enhancing the Equity Momentum Premium by Incorporating Fundamental Characteristics

An alternative approach to the momentum premium can produce better risk-adjusted returns than technical momentum signals alone.

The momentum premium has been well documented since 1993, when Jegadeesh and Titman¹ showed that an equity strategy of simultaneously buying past winners and selling past losers can generate abnormal returns over holding periods from three to 12 months. At Breton Hill, we believe that traditional risk premia can be augmented by a secondary screening process that reduces breadth and increases conviction without compromising the core characteristics of the desired premium. As new sets of information become available, we believe we can continue to sharpen existing signals and deliver higher conviction portfolios beyond what has been traditionally offered in the risk premia space. To demonstrate, we will compare our results of an enhanced momentum portfolio to that of a traditionally constructed long/short cross-sectional momentum portfolio, as defined by Jegadeesh and Titman. Our analysis suggests that there can be an overall improvement in returns, with less risk, while still meeting the basics characteristics of a traditional momentum signal.