Price Momentum returns have surged higher, making it the best performing factor YTD. The macro backdrop is supportive of Momentum strategies, but there is an increased risk of a near-term drawdown within Momentum. Historically Momentum of Price return tend to be skewed and can drop significantly in a short period of time. The factor dropped -4% in three trading days earlier this week, adding to investors concerns around the factor.
Return attribution or Price Mo returns shows Technology has been the largest contributed to the factor YTD. Tech was also the largest drag on Price Mo last week. Nearly 40% of S&P 1500 top decile Price Mo names are in Tech, and the relative L-S factor exposure to Technology is high as well. High sector concentration further increases the risk of sharp drawdown for Price Mo whenever there is a negative sentiment shock to AI.
Volatility of Price Mo has been rising for both short-term and long-term this year, currently reaching its 80th %tile. The turnover rate for the factor has also climbed higher, implying: 1) higher factor volatility short term; 2) increased chasing of momentum gains. Both suggest increased risk for forward drawdown.
To offset the risk of Price Mo crashes, one of the strategies is to set constant volatility target dynamically and adjust the holding percent based on the factor volatility, as higher Momentum of Price volatility saw higher crash risk historically.
Hedging Price Mo Risk: Price Momentum has significantly outperformed recently, becoming the best performing factor YTD. Rapid gains over the past few weeks have been met with concerns about the sustainability of Momentum gains, and it was one of the worst performing factors last week.
The return breakdown for Price Mo shows Tech exposure is a large contributor to the factors YTD gains. Momentum vol is tied to sentiment swings around Tech in general and AI in particular.
Currently, nearly 40% of the S&P 1500 top decile Price Mo names are Tech and the relative L-S Price Mo basket is also heavily Technology exposed. In addition, the L-S basket has increasingly exposed to Energy, whose return has been pushed by Iran War sharply recently as well and many drop if oil prices move lower.
The volatility for Price Mo has increased in 2026. Both the short-term and long-term factor volatility are up near their 80th %tiles, which is rare outside of recessions. The quick path to lower Mo volatility would be a rotation out of risk-on factors.
The turnover rate in the top decline of Price Mo top has elevated sharply since April, suggesting increasing investors disagreement about factor forward performance. Though higher turnover rate itself doesn’t suggest future drawdowns, the current 80th %tile reading implies : 1) higher factor volatility short term; 2) increasing momentum chasing.
To protect Price Mo crashes from sharp short-term (i.e. crashes around GFC and COVID), one strategy is to dynamically adjust holdings according to realized volatility, given the crash usually happens during high factor volatility periods. A constant volatility allocation helps lower overall portfolio volatility and avoid losses in a short term crashes. Setting annual target vol to 12%, generated a 3.1pp better annualized return for indexed Price Mo.
