What is a Momentum Fund?
A momentum fund invests in companies with a trend of positive earnings or price, expecting a further increase in the price of the stock.
How Does a Momentum Fund Work?
Momentum funds evaluate the trends for individual companies in the stock market. When a momentum fund spots an upward trend in the company's earnings or price, for example, it will buy shares or options in the company, expecting to sell for a profit.
Growth in earnings or the price of the stock may indicate that the company or the industry segment is in a growth phase. Momentum fund strategies are particularly popular during long runs in a 'bull' market, e.g. long term rises in stock prices and earnings.
Why Does a Momentum Fund Matter?
While momentum funds may look closer at the fundamental underlying values behind a stock price, their decisions are based on the trend or 'momentum' of the stock price. This form of market 'timing' is considered to be highly speculative, since it does not seem to take into consideration a long-term, value-oriented investment strategy.