What Is Up Minus Down (UMD)?
UMD (also called MOM or WML, Winners Minus Losers) is the academic momentum factor: a long-short portfolio that is long stocks with the strongest trailing returns (typically the past 12 months, skipping the most recent month) and short the weakest. It captures the well-documented tendency of recent winners to keep outperforming recent losers over the following months.
UMD is one of the most robust factors across markets and asset classes, but it is prone to severe, sudden reversals known as momentum crashes, which is why it is usually paired with a value hedge such as HML-Devil.
Example: UMD held a 25% weight in the Sharpe-optimal long-only factor portfolio, the dominant directional bet that the value sleeve was chosen to hedge.
Literature and references:
Narasimhan Jegadeesh and Sheridan Titman, Returns to Buying Winners and Selling Losers, Journal of Finance, 1993.
Mark M. Carhart, On Persistence in Mutual Fund Performance, Journal of Finance, 1997.
See also