Despite Equity being the best performing factor YTD (up 11.99%), it struggled in August amid higher rates and a challenging emerging market environment. Fixed income also failed to diversify in August, with our Interest Rates factor down -0.36% as rates rose. 


Let’s take a look at performance of the Two Sigma Factor Lens for the month.


Exhibit 1: Two Sigma Factor Lens Performance in August

Source: Venn by Two Sigma. The 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 - August 2023


  • Equity Styles: five out of six beta-neutral equity style factors were positive in August, with Small Cap being the only one to post negative returns. Referring to Exhibit 2, five or more equity styles have been positive in roughly 19% of the months over their shared history. Historical data suggests it’s quite rare for only one equity style factor to be positive, and equally rare for all six to be positive. Never have all six been negative on a monthly basis. 

In general, style factors (both equity and macro) are associated with positive return premiums over time, and are considered alpha-seeking strategies within their asset class. With the exception of Small Cap, all of Venn’s equity styles have posted positive return premiums over their full history.1 


Exhibit 2: Breakdown of Positive Monthly Returns from Equity Style Factors


Source: Venn by Two Sigma. Period from Jan 2008–August 2023.


  • Emerging Markets (EM): Our Emerging Markets factor represents a pure emerging market exposure. Breaking it down, it is composed of fixed income, currencies, and equities, and is orthogonalized against our Equity, Interest Rates, Credit, and Commodities factors, as well as a global currency basket.

While Venn’s Emerging factor helps determine how a pure EM factor performed in August, the spirit of our factor can be observed in more tangible ways using market indexes. For example, a large driver of negative performance came from the equity component of our raw factor input. As a result, looking at relative performance between an EM and developed equity index2 we can get a feel for how EM equities did relative to the developed world. While not directly comparable to our residualization process, relative analysis like this helps to control for the effect of equity performance and isolate the effect of emerging markets itself. As we show below, EM equities underperformed developed equities by 377 basis points in August. 


Exhibit 3: Underperformance of Emerging Markets in August

Source: Venn by Two Sigma

Continuing with this thought exercise (also Exhibit 3), we looked at the performance of Chinese equities, the largest country exposure within EM at 29.79%.3 Chinese equities underperformed developed equities by an even greater 6.57% on the back of weak macroeconomic data and real estate market fears, dragging down the performance of our EM factor even further. More specifically, one the largest developers in China (Country Garden) may be on the brink of default, threatening a similar event to what was seen with Evergrande in 2021.4



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1Full history begins March 1st, 1995, but Jan 1st, 2008 for Crowding. 


2  Emerging markets represented by MSCI Emerging Markets with developed markets represented by MSCI World


Source: as of 8/31/2023. On a separate note: China makes up 3.09% of MSCI ACWI as of 8/23/2023, source:





References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

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. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features.  Such statements merely reflect our current plans.  They are not intended to indicate when or how particular features will be offered or at what price.  These planned or future development efforts may change without notice. 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.

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