However, momentum does have a dark side, as it has had some of the worst crashes.

The large gains associated with the momentum factor come at the expense of a very high excess kurtosis (fat tail) of 18.2, as well as a pronounced left-skew of -2.5, which is to say that values that are less than the mean are fewer but farther from the mean than values that are greater than the mean.

These two features of the momentum strategy mean there is the risk of a large loss. Said another way, the apparent “free lunch” of momentum returns can very rapidly turn into a free fall, wiping out decades of returns. This feature makes the strategy unappealing to investors with strong risk aversion.

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