We don’t just see ourselves as fund managers — we think of ourselves more as scientists of the financial markets. No, we’re not “scientists” in the strict sense, but we are constantly immersed in the scientific method.
Because of that mindset, we rarely fall off our chairs from a surprise finding.
But this research came close.
When you manage client capital, you have to be certain you're doing the right thing. And if you’re anything like us (slightly obsessive), you're constantly checking, verifying, and retesting your assumptions — that nagging feeling that you might have missed something never quite goes away. You must always question your own findings.
Don’t worry, this is not what our office looks like, but you get the idea about being “obsessive”.
A Quick Recap: We’re Momentum Investors
Let’s start with the basics: our strategy falls squarely within the realm of momentum investing.
A reminder: momentum is the remarkably logical phenomenon that stocks which have performed well relative to peers (winners) will generally continue to outperform. It is the tendency of stocks to continue to trend in the same direction once they are in motion.
There is a mountain of research from both the industry and academia proving that momentum exists — across all markets, over centuries, and in every major country. (By the way, we’ve compiled an entire library on this site linking to momentum research.)
But even with all that, we still had to ask: What if we tested it our way? This simple research we’ve done some years ago may be the most definitive proof we’ve ever seen that momentum is real.
This might be our most important blog post. Get ready to have your mind blown.
Step One: Start With the Nasdaq 100
Let’s keep it simple. We’ll use the Nasdaq-100 as our stock universe for this experiment. We use both the Nasdaq-100 and the S&P 100 in our system — but for this experiment, you could use almost any major stock index.
A quick reminder: the Nasdaq-100 is already a form of momentum system in disguise — because stocks get added to it based on their growing market capitalisation. In other words, to even make the list, a stock already has to have been going up, and up, and up. So we’re selecting from a group of thoroughbred racehorses.
Figure 1 shows the Nasdaq-100 from 2007 to date. Not bad as an investment, right? (Don’t tell the hedge fund industry this, but if you simply bought a Nasdaq-100 ETF like the QQQ in 2007, you would have outperformed the majority of hedge funds. I kid you not.)
Figure 1.
Step Two: The Random 5
Have you heard the classic Wall Street quip that goes something like this:
“A monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one picked by the experts.”
So, we tested what happens if you simply pick five random stocks each month from the universe of Nasdaq-100 stocks — literally random, selected by formula, not by us.
We also used the most recent month’s daily volatility to weight each of the five stocks: more capital to low-volatility names, less to the high-volatility ones. This is exactly the approach we use at Alpha-Elite.
And guess what? Even random stocks produced decent outcomes. Why? Because we’re picking from the cream of the crop. Random selection still works — when your universe is elite.
Figure 2 shows the results of this “Random 5” strategy. This shows the results of 10 tests. Please note, the Nasdaq-100 still performs really well, purely because the index is weighted in favour of the largest stocks, which gives it the extra “boost”.
Figure 2.
Step Three: Traditional Momentum
Now, here’s how most of the industry and academia define a basic momentum strategy: simply use the total return (performance) of each stock over the past 6, 9, or 12 months, rank the stocks from best to worst, and select the top performers in a monthly or quarterly rebalance. That’s it.
For this test, we once again used the universe of Nasdaq-100 stocks. We applied a 6-month lookback to rank stocks purely on total return for each stock and — just like before — allocated money based on the previous month’s daily volatility.
Figure 3 shows the results using this very simple, very generic “total return” metric. And yes — it doesn’t just mildly outperform the random portfolios and the index… it crushes them.
Figure 3.
If you’re a researcher, this is already a WOW moment. This alone proves, without question, that momentum is real. It also shows how easily the traditional hedge fund world can be challenged.
But it gets even better.
Step Four: Our Metrics — The Real Edge
Years ago, when we set out to build a stock selection strategy that could consistently outperform the market over the long term, we leaned heavily on creativity and lateral thinking. We built metrics using nothing but price data: daily highs, lows, closes, and volume — across the previous six months. These metrics don’t exist in the rest of the fund management industry.
We got great results early on. But here’s the wild part: we didn’t even realise we had built an advanced momentum system that was capturing core aspects of behavioural finance. We didn’t fully grasp it ourselves at first!
Only after diving deep into academic research and reading every book and paper we could find did we realise:
a) Momentum investing is a well-studied phenomenon, and
b) Other researchers had uncovered similar financial behaviour to what we’d found on our own.
It was both exciting and strange — like inventing something and only later learning it already has a name. Except, we do it differently:
The Super Seven
After years of refinement and evolution, we now use seven proprietary metrics that are far superior to basic total return in identifying momentum. These metrics allow us to uncover investor psychology, conviction, trend strength, and structural inefficiencies in the market — all through price data alone.
That’s... uh... Figure 4. It simply dwarfs the other graphs.
Figure 4.
And yes, before you ask: it works on the S&P 100, on European index stocks, on Canadian, Australian, or any other index — it works everywhere. The result is always the same.
It works well on a 4, 5, 6, 7, 8-month lookback and even longer (so we did not curve-fit it) — but it works especially well with a 6-month lookback. Our hypothesis is that 3 and 4 months are too short, and anything longer than 9 months is too long.
Final Thoughts: The Proof Is Here
Now you understand why I called this our most important blog post ever.
We don’t want to shout this from the rooftops — but if you’re a current or future investor, this should be the ultimate proof.
But — to emphasise — all of this works over the long term. We don’t always outperform the index in the short run, but over the long term is where the real magic happens.
It’s what gives us the confidence to say — loudly, clearly, and without doubt:
It works. It works. It works.