The momentum effect is a classic anomaly documented many times in many different markets. Therefore it is no surprise several studies are showing that momentum also appears within the REITs universe and REITs with the highest past performance beat lower-performing trusts.
We add this effect into our database; however, we advise caution as one recent academic study (see Huerta, Rivas for details) documents that momentum is starting to lose its statistical and economic significance.
Momentum persistence is usually explained by behavioral biases like investor herding, investor over and underreaction, and confirmation bias. For example, if a firm/trust releases good news and the stock price only reacts partially to the good news (under-reaction bias), then buying the stock/trust after the initial release of the news will generate profits.
Confidence in anomaly's validity
Backtest period from source paper
Notes to Confidence in Anomaly's Validity
Period of Rebalancing
Notes to Indicative Performance
per annum, data for long only strategy with a 3 month holding period, data from table 1
Notes to Period of Rebalancing
Number of Traded Instruments
Notes to Estimated Volatility
Notes to Number of Traded Instruments
calculated as a one third of estimated average number of REITs in US market (data from studies in “Other papers” section)
Notes to Maximum drawdown
Notes to Complexity Evaluation
Simple trading strategy
The investment universe consists of all US REITs listed on markets. Every month, the investor ranks all available REITs by their past 11-month return one-month lagged and groups them into equally weighted tercile portfolios. He/she then goes long on the best performing tercile for three months. One-third of the portfolio is rebalanced this way on a monthly basis, and REITs are equally weighted.
This is not the only way to capture the momentum factor in REITs as a consequential portfolio could be formed as a long/short or from quartiles/quintiles/deciles instead of terciles or based on different formation and holding periods (additional types of this strategy are stated in the “Other papers” section).
Hedge for stocks during bear markets
No - The selected strategy is a long-only, and as such has a strong exposition to equity market risk, therefore it can’t be used as a hedge/diversification during the time of market crisis.
Derwall, Huij, Brounen, Marquering: REIT MOMENTUM AND THE PERFORMANCE OF REAL ESTATE MUTUAL FUNDS
REITs exhibit a large and prevalent momentum effect that is not captured by conventional factor models. We show that this REIT momentum anomaly hampers proper judgments about the active management of REIT portfolios. By contrast, a REIT momentum factor provides incremental explanatory power to performance attribution models for REIT portfolios. Using this factor, we find that REIT momentum explains a great deal of the abnormal returns that actively managed REIT mutual funds earn in aggregate according to earlier related studies. Accounting for exposure to REIT momentum also materially influences cross-sectional comparisons of the performance of REIT mutual funds. Our results have important implications for performance evaluation, alpha-beta separation, and manager selection and compensation.
Strategy's implementation in QuantConnect's framework
Hung, Glascock: Volatilities and Momentum Returns in Real Estate Investment Trusts
This research studies momentum returns in REITs by investigating the cross sectional relationship between different types of volatilities and asset returns of REITs. We examine asymmetric risk effect in momentum returns with a GARCH-in-mean model. We also study the effects of idiosyncratic volatility and aggregate market volatility on asset returns. We have four main findings. First, momentum returns display asymmetric volatility. Momentum returns in REITs are higher when volatility is higher. Second, REITs with lowest past returns (losers) have higher
idiosyncratic risks than those with highest past returns (winners). The difference in losers’ and winners’ idiosyncratic risks is significant, and can partially explain momentum returns. Third, we find investors require a lower risk premium for holding losers’ idiosyncratic risks, but require a higher risk premium for holding winner’s idiosyncratic risks. Four, we find a positive relation between asset returns and aggregate market volatility, and the magnitude of the relation is larger for losers than for winners.
Huerta, Rivas: Has a profitable momentum strategy for REITs disappeared?
This study examines the existence of a profitable momentum strategy for Real Estate Investment Trusts. We confirm the findings of previous studies: REIT momentum returns are positive and significant in the period pre-1990 and became even larger between 1990 and 1999. However, when extending the time period studied to 2009 and by introducing other modalities of this trading strategy, momentum generated returns become statistically undistinguishable from zero. We present evidence that a momentum strategy for REITs has dissipated and conclude that our findings provide evidence in favor of the efficient market hypothesis.
Feng, Price, Sirmans: Equity Real Estate Investment Trust (REIT) Anomalies to Market Efficiency: Momentum and Drift
Using a sample of equity Real Estate Investment Trusts (REITs), we examine the industry-level relation between the two dominant asset pricing anomalies, the continuation of past price movements (momentum) and the incomplete reaction to earnings news (post-earnings-announcement drift). With the former having long been established in REIT returns, and the latter having only recently been documented, we show that the two returns phenomena are highly related in the cross-section of industry-level returns, with drift being of greater magnitude and significance. Additionally, in time-series tests we demonstrate that the payoff to a REIT momentum strategy is subsumed by REIT drift.
Moss, Clare, Thomas, Seaton: Trend Following and Momentum Strategies for Global REITs
This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination of the two. We examine the results in terms of both a dedicated Global REIT exposure, and the impact on a multi ‐ asset portfolio. We find that the main improvements arise when the broad index is replaced with one of the four trend following (TF) strategies. The portfolios deliver similar returns but volatility is reduced by up to a quarter to the 8‐9% range, the Sharpe ratios increase by 0.1 to 0.5 with the main benefit being the reduction in the maximum drawdown to under 30% compared to 43% when the broad index was used. We thus find that a combined momentum and trend following Global REIT strategy can be beneficial for both a dedicated REIT portfolio and adding REITs to a multi‐asset portfolio.
Guidolin, Pedio: How Smart Is the Real Estate Smart Beta? Evidence from Optimal Style Factor Strategies for REITs
This paper has a twofold objective. First, we contribute to the stream of literature that investigates whether traditional asset pricing factors show any predictive power for the cross-section of Real Estate Investment Trust (REIT) returns. In particular, we investigate the existence of a premium associated to the Value, Size, Momentum, Investment, and Profitability factors over the period 1993-2018. We find support for all the pricing factors but for the Profitability one. Second, we investigate whether a set of smart beta strategies, based on the combination of the identified factors, may outperform similar allocation techniques that do not exploit factors. We find that all the proposed factor-based strategies display a higher risk-adjusted out-of-sample performance than a simple buy-and-hold investment in the real estate market (proxied by the FTSE NAREIT All REITs Index). In addition, we find that when factor-based strategies are implemented, REIT-only portfolios display risk-adjusted performances comparable to those of diversified portfolios that include equity, bond, and commodities.