Improving Diversification by Adding Momentum

For investors looking to balance risk mitigation with cost considerations and return potential, we offer momentum strategies as a potential solution.

While all prudent investors consider the risk of capital loss when making investment decisions, the methods employed to manage that risk can vary widely. Positions in more “defensive” assets such as bonds or gold, market-timing strategies and investing in volatility products such as options are just a few of the approaches investors have taken in an attempt to protect their portfolios from a market drawdown. Each of these comes with pros and cons, of course, along with associated implicit or explicit costs that must be considered.

This paper describes the characteristics of momentum strategies, the role they may play in a diversified portfolio and their historical performance across market environments. We use the Neuberger Berman Breton Hill Velocity strategy as an illustration of how momentum strategies may be brought together in a single strategy that seeks to generate return in most market environments while also seeking to protect capital during periods of stress.