My long-running Hot Hands strategy has run hot and cold for several years.
The Hot Hands funds outperformed in 2019 and 2020, but tripped up in 2021. The strategy bounced back in 2022, only to land on its face in 2023. Hot Hands is back on track in 2024, with Growth Index (VIGAX) outpacing Total Stock Market Index (VTSAX), 32.1% to 27.6%.
Is this the beginning of a hot streak, or is it another head fake?
That’s the critical question anyone following or considering the strategy must answer. I’m sticking with the Hot Hands for another year—yes, I’ve been following this strategy with my own money for years; I wouldn’t write to you about it if I wasn’t willing to do that.
But I don’t expect you to follow my lead mindlessly. So, I’ll give you the analysis and context you need to come to your own conclusion. Let’s start at the beginning.
The Set Up
My mentor, Dan, first wrote about the Hot Hands strategy way back in May 1995. He and I have followed the same rule set—updating it as new funds have been introduced—ever since.
The idea behind the Hot Hands strategy is simple: What has outperformed will continue to outperform—and what has trailed will continue to trail—until market trends, sentiment and economic conditions change.
In the industry parlance, this is called momentum investing. It has many practitioners, including Vanguard. In 2018, they launched U.S. Momentum Factor ETF (VFMO) specifically to take advantage of, well, market momentum. (I’ll compare the Hot Hands strategy to this ETF later in the article.)
While some investors get pretty fancy with their momentum calculations, we’ve always kept it simple.