There is still no standard in the market nor official nomenclature to define custom indices, meaning different providers have different names for the same type of strategy – which can be confusing. Still, we can define a few key types which are common among most investors:
These strategies take advantage of market trends, which tend to continue in the same direction partly because they become popular. Momentum strategies tend to be relatively short-lived, since trends often come to an end and are replaced by new ones. Stocks which show an upward trend are attractive to momentum investors.
Carry trades involve borrowing at low rates of interest and investing the proceeds into higher-yielding assets. Carry strategies are often currency-based, meaning they borrow in low-rate currencies and invest in currencies which offer higher rates.
A value strategy targets stocks which the market has underpriced, or which are trading at levels that are below fair value. Stocks are underpriced partly because investors are inefficient and irrational, providing opportunities for value investors who believe a stock’s long term fundamentals warrant a higher rating.
Other popular strategies include size (small stocks tend to outperform large ones over the long term), quality (where quality can be measured by various metrics, including the quality of underlying earnings) and low volatility.
Some factors, or strategy types, can be found across different asset classes (momentum, for example), while others are more specific to certain asset classes.