Active or Passive Momentum Investing: Which one is better?

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Investors in the stock markets across the globe always wonder why and how the Hedge Funds are generating superior returns compared to their peers. They also wonder how these returns can be generated by them in such a short span of time? The simple answer to these questions is that Hedge Funds across the globe among their many strategies deploy Momentum Investment strategy and actively pursue it to successfully generate Alpha.

Momentum as a strategy may be a relatively new concept for Indian investors even though there are few funds offered by various asset management companies (AMCs) based on the momentum strategy. But, one thing to note here is that all these funds are passive funds currently i.e. they track momentum indices created by NSE and BSE Indices.

Nifty MIDCAP 150 Momentum 30 is one of the best performing Index among all (more than 90) indices floated by the NSE. It has given a total return CAGR of 22.55% since its inception on 1st April 2005 till 28th April 2023. On the other hand, Nifty 200 Momentum 30 has yielded total return CAGR of 19.11% during the same period. Momentum indices have generated historically high returns.

While these indices have historically generated significant alpha, there are some opportunities for an active manager which opens up possibilities to generate even higher alpha than the passive funds out there.

One of the biggest advantages for actively managed momentum funds would be rebalancing. The index methodology currently allows for rebalancing at an interval of six months, while an active manager has no such restrictions and can rebalance the fund portfolio as and when needed on a real time basis. Passive funds have to be fully invested all the time i.e. even during bear phases of the market, while actively managed funds can reduce their equity exposure to protect down-side better by resorting to hedging.

Another advantage that active Momentum Funds have over passive is that the former uses both Relative and Absolute Momentum while investing whereas passively managed funds uses only Relative Momentum. For actively managed funds there’s no fixed number of stocks in which it can invest. It’s all based on capital and position sizing; whereas passive funds can invest only in those stocks which are the constituents of the index to which the fund is benchmarked.

Now, this strategy of active Momentum investing will be deployed for the first time in Indian market to help Indian investors to outperform the market and generate Alpha. SAMCO Mutual Fund (MF) has taken a lead in this and has launched India’s first active Momentum fund in the market.

The fund aims to invest in stocks exhibiting momentum characteristics such as breakouts, price leadership, and more, utilizing a proprietary momentum-seeking algorithm to generate superior risk-adjusted returns for investors. Stocks in Momentum shall be selected via Time Series Momentum or Cross-Sectional Momentum which are two distinct measures used to evaluate the performance of stock.

*The Author is Fund manager, SAMCO Mutual Fund. Views are personal.

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