Understanding Momentum and Trend in Cross-Sectional Asset Class Factors

Momentum is described as using recent performance to decide whether to be long or short within the cross section of a single asset class, while trend is going in the direction of whatever has worked. Trend supersedes momentum in terms of explanatory power in the cross section and time series of factors in the multi-asset space. Trend is meaningful in explaining asset classes such as futures, stocks, bonds, commodities, credit spread indices, and FX rates. The implementation of trend as a factor can be nuanced, and it is important to determine whether trend is trying to identify opportunities within sectors or if it is a beta timing factor. When trend has big years, it is not making profits from spreads between related markets, but rather from being directly right across a broad swath.