Portfolio Construction with Hierarchical Momentum

Abstract

This article presents a portfolio construction approach that combines the hierarchical clustering of a large asset universe with the stock price momentum. On one hand, investing in high-momentum stocks enhances returns by capturing the momentum premium. On the other hand, hierarchical clustering of a high-dimensional asset universe ensures sparse diversification, stabilizes the portfolio across economic regimes, and mitigates the problem of increased drawdowns typically present in momentum portfolios. Moreover, the proposed portfolio Show more