One of the most robust findings in factor investing is the strong negative correlation between value and momentum strategies, and the superior performance of their combination.
Negative correlation
Asness, Moskowitz, and Pedersen (2013) document:
- Within individual equity markets: correlation approximately -0.60 (e.g., -0.64 in Japan)
- Across asset classes: average correlation approximately -0.54
- The first principal component of all value/momentum strategies loads with opposite signs on each, explaining 54% of equity strategy covariance
This negative correlation holds even when value is measured with lagged prices to eliminate mechanical overlap with the momentum signal (-0.28).
Combination benefits
Return enhancement: a 50/50 value-momentum combination across all eight asset classes produces an annual Sharpe ratio of 1.42, far exceeding either strategy alone.
Drawdown reduction (Asness et al. 2014):
- Momentum alone: maximum drawdown -77%
- Value alone: maximum drawdown -43%
- 60/40 HML/UMD blend: maximum drawdown -30%
Each factor hedges the other’s worst periods: momentum helped during the 1999-2000 growth bubble (when value suffered), while value helped in the 2009 momentum crash (when beaten-down stocks suddenly rallied).
Opposing factor exposures
Asness et al. (2013) find that value and momentum have opposite exposures to global funding liquidity risk:
- Momentum is positively exposed (vulnerable to liquidation events)
- Value is negatively exposed (contrarian positions less affected by funding shocks)
A 50/50 combination is essentially immune to funding shocks yet still earns large positive returns, indicating liquidity risk is at best a partial explanation.
Practical implications
Asness et al. (2014) argue that even under the extreme assumption of zero expected momentum returns, the -0.4 correlation with value makes momentum valuable as a diversifier. The optimal portfolio always includes meaningful momentum weight.
The QMJ factor adds a third dimension: quality is negatively correlated with value but provides “flight to quality” benefits during crises, complementing both value and momentum.