Momentum investing: Why volume and size matter

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Subscribe to enjoy similar stories. The appeal of momentum investing, with its "buy high, sell higher" mantra, has surged, challenging traditional investment norms. Yet, behind the simple idea lies a complex mechanism where fund size and trading volume can greatly influence success.

In this space, careful calibration is essential, as larger funds risk distorting prices, while niche portfolios can better preserve strategy integrity. In the niche world of momentum investing, volume plays a pivotal role in determining a strategy’s effectiveness. Large asset managers, often holding substantial cash to capitalize on market corrections, face limitations with their sizeable funds.

These constraints make it challenging to invest in smaller, less liquid securities where momentum thrives, potentially missing key opportunities. Read this | Meet the champions of momentum investing who beat competition in post-covid bull market Specialized momentum strategies, especially niche PMS portfolios, approach this differently, minimizing market impact and maintaining the purity of momentum signals. Designed to hold full market exposure, these portfolios only shift to cash when market-wide momentum significantly weakens—such as during the Covid-19 crisis—highlighting their resilience in varying conditions.

Fund size further impacts momentum by influencing market dynamics. Large funds entering or exiting illiquid positions can distort prices, creating artificial movements that obscure genuine momentum signals. This problem is heightened in passive momentum funds, which operate within a limited stock universe and follow predictable rebalancing schedules, making them vulnerable to front-running.