- 1Critics often argue that financial anomalies (like Momentum and Value) only exist in untradable, illiquid micro-cap stocks.
- 2Israel and Moskowitz proved that the return premiums of size, value, and momentum remain highly significant and actionable in the largest, most liquid stocks in the world.
- 3While the "short leg" is profitable, the vast majority of the alpha can be captured strictly through the "long leg" (long-only strategies).
#The Size Criticism: Does it Work in Large Caps?
The researchers split the US equity universe into Size groups (Micro, Small, and Large caps). They then tested the performance of Size, Value, and Momentum anomalies within each bucket over an 86-year timeframe.
The Findings: Yes, the gross returns for Value and Momentum are mathematically highest in the micro-cap bucket. Micro-caps are illiquid and ignored by analysts, leading to immense mispricings.
However, the premiums in the Large Cap space were robust, persistent, and highly significant. Furthermore, when adjusting for transaction and implementation costs, the net returns in Large Caps were remarkably competitive. The idea that anomalies vanish once you leave the Russell 2000 was empirically destroyed. Large-cap momentum and value are structural features of the S&P 500, not ghosts.
#The Shorting Criticism: Do You Have to Short?
A long/short hedge fund creates its returns by going Long the top decile of a factor, and Shorting the bottom decile.
Critics pointed out that the Short Leg is incredibly profitable. Because shorting is expensive and dangerous, critics argued that the "Anomaly Premium" is just the unharvestable illusion of the short side.
The Findings: Moskowitz and Israel looked exclusively at the Long Leg vs. the Short Leg. Their results demonstrated that while the Short leg contributes heavily to Momentum outperformance in certain phases, the Long Leg alone generated a highly significant premia over the market benchmark across all three anomalies (Size, Value, Momentum).
A long-only mutual fund or retail investor does not need to short toxic companies to harness the power of factors; they simply need to systematically hold the top decile of fundamental winners. The Long Leg works efficiently and carries no borrow costs or infinite risk tails.
#Conclusion
Israel and Moskowitz built the bridge between theoretical financial anomalies and practical institutional capacity. Their work proved that factor investing is not a mirage hidden in illiquid penny stocks. The rules of factor outperformance apply equally to Apple, Microsoft, and the largest mega-caps on Earth, empowering retail and institutional long-only investors alike to harvest these premiums.
Last updated: April 1, 2026