Momentum: The King of Factors

In the world of quantitative investing, few ideas are as enduring — or as powerful — as factors. These are measurable characteristics of securities that have historically helped explain differences in performance. Some of the best-known include value, quality, size, and low volatility.

But one factor stands out above the rest: momentum.

What Is Momentum?

Momentum refers to the tendency of winning assets to keep winning — and losers to keep losing — for a period of time. In other words, assets that have recently performed well tend to continue outperforming in the near future. This idea may seem deceptively simple, but it has been observed across asset classes, time periods, and geographies. From stocks to commodities to currencies, momentum has shown remarkable persistence.

And it’s not new.

One of history’s most famous economists, David Ricardo — best known for the concept of comparative advantage — was also an investor. His golden rule? “Cut your losses and let your profits run.” In essence, he was following a momentum strategy back in the early 19th century. It paid off. His fortune, in today’s money, would be worth several billion pounds.

Why Does Momentum Work?

You might wonder: if this effect is so well known, why hasn’t it disappeared?

There are a few compelling reasons why momentum continues to work — and likely will for a long time:

• Institutional behaviour: Large asset managers don’t shift positions overnight. Like oil tankers, they move slowly. As they gradually increase exposure to a stock or sector, that buying pressure helps drive continued performance.

• Delayed price discovery: Markets are not perfectly efficient. Positive information doesn’t get fully priced in immediately. It takes time for news to circulate, be analysed, and influence broader investor behaviour.

• Human psychology: Perhaps the most enduring explanation is behavioural. Investors are social by nature. We tend to follow the crowd. When others are buying, we feel more comfortable doing the same — leading to self-reinforcing price trends.

In short, momentum is not just a statistical anomaly — it’s deeply connected to the way markets function and how people behave within them.

Momentum in Forward Lucy

For Forward Lucy, momentum is a core component of our investment process. It plays a key role in determining which factors to emphasise at any given point in the cycle. While other factors rotate in and out depending on the market environment, momentum is almost always present — a steady signal that reflects both data and behaviour.

We believe momentum isn’t just a back-tested anomaly. It’s a fundamental truth of how markets work. And as long as markets are driven by institutions, inefficiencies, and human emotion, momentum will remain a vital source of return.