286The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period March 1995 - April 2020.

 

Markets and Factor Summary

  • The Equity factor recorded a strong recovery from its drawdown last month. The factor’s 10.35% returns were the second largest monthly gain since the start date of the Two Sigma Factor Lens (March 1995), just underperforming the 10.60% gains experienced in April 2009 (the beginning of the Global Financial Crisis recovery).1
    • Winners of the rally:
      • The Local Equity factor in the USD version of the factor lens posted strong performance, with the MSCI USA Index outperforming the MSCI ACWI Index by 2.8% in April.2
      • The Small Cap factor also benefited in the equity market recovery, recovering some losses from earlier in the Coronavirus Crisis. In the U.S., the Russell 2000 Index outperformed the Russell 3000 Index, rallying in the last week of the month in particular with gains fueled by sectors like energy and materials.3 International small cap stocks also logged gains with the MSCI ACWI ex USA Small Cap Index outperforming the MSCI ACWI ex USA Index in April.4
    • Losers for the month:
      • The Low Risk and Value equity style factors did not stage a comeback like Small Cap.
        • Low Risk continued to struggle, posting -6.10% returns in April for a YTD return of -21.75%. While both of its components, Residual Volatility and Beta, were negative for the month, there was some interesting performance intra-month. The Beta component had strong returns in the first half, up 3.93% through April 16th. It then reversed course, particularly struggling in the final week, with April 29th delivering the hardest blow of -2.96%. The Residual Volatility component, on the other hand, bled throughout the month.
        • All four of Value’s components were down in April, led by Earnings Yield. Most of them saw a significant drop mid-month. A recovery towards the end of the month was not enough to bring the overall factor positive.
      • Quality, an equity style that performed very strongly in March, recorded negative returns. The factor’s Profitability and Leverage components continued their positive performance from last month, however those gains were more than offset by losses from Earnings Variability and Investment Quality. 
      • The residualized Commodities factor returned -3.37% in April. The most notable occurrence during the month was when the price for the May WTI crude oil futures contract plunged into negative territory for the first time in history.5 This unprecedented event underscores the market’s concerns around oil storage capacity as well as weak demand.6
        • Performance outside of the energy sector was mixed. Livestock, grains, and softs were down, while precious and industrial metals outperformed.
      • While the underlying CBOE PutWrite Index for the Equity Short Volatility factor posted 5.23% returns, as U.S. equity market volatility dropped in April from elevated levels,7 the residualization to Equity brought the overall factor negative. The factor does well when equity markets are range-bound, and it tends to struggle in periods of large up or down equity moves.
      • While global government 7-10 year bonds generally outperformed, as evidenced by the 0.57% performance of the Interest Rates factor, the long/short, duration-neutral Fixed Income Carry factor saw losses in April. Losing positions within the factor’s portfolio included long Australian bonds and short U.K. Gilts.

 

Sign up for Venn to view your portfolio's exposures to these factors.

 

REFERENCES

1Source: The historical performance of the Equity factor in the Two Sigma Factor Lens using monthly data for the period March 1995 - April 2020.

2Source: Venn.

3Source: Financial Times article “US small-caps rebound as equity rally broadens” on April 30, 2020.

4Source: Venn.

5The Bloomberg Commodity Index that underlies the Commodities factor likely didn’t have exposure to the May contract, as the index’s roll period occurs between the 6th to 10th business days of the month (i.e., April 8th to April 15th), and this event happened on April 20th. Source: BCOM Methodology via https://www.bloomberg.com/professional/product/indices/bloomberg-commodity-index-family/

6Source: CNBC article “Oil drops 3% in volatile session as storage capacity fears and weak demand weigh” on April 27, 2020.

7Source: http://www.cboe.com/vix

 

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

Recent Posts