Source: Venn. 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 - February 2021.
Market Themes & Factor Performance Summary
- Global Equity markets finished the month higher, at least partly driven by an improving COVID situation and expectations for more fiscal support (at least in the U.S.).
- Inflation concerns pushed yields higher over the month, with a sharp spike in the final week of February.1 This activity hurt the Interest Rates factor’s performance.
- There was also dispersion among 7-10 year sovereign bond yields in February, which meaningfully impacted the performance of the Fixed Income Carry factor, which is designed to be duration-neutral. In particular, the factor’s short positioning in relatively low-yielding bonds (like in Japan and Europe) detracted from the factor’s performance, as yields in those markets increased less than their peers. Further, the factor’s long positioning in relatively high-yielding bonds (like those in Australia2 and Canada) hurt, as yields there rose by more than average.
- The factor with the highest returns in February was Trend Following. Following trends benefitted, particularly in commodities markets.
- Commodities have performed well over the past year3, resulting in the Trend Following factor’s general long positioning. That positioning benefitted, as commodities rallied in February. Venn’s residualized Commodities factor, for example, gained 2.86%, supported by most sectors but most notably energy4. Oil was up ~15%5 due in part to lower inventories (with U.S. supply falling due to extreme weather in states like Texas) as well as expectations for stronger demand as the economy reopens.6
- Emerging Markets underperformed developed markets in February. In equities, the MSCI Emerging Markets Index was up 0.76% relative to the MSCI World Index’s 2.56% gains.
- February was another month that saw large moves in the equity style factors:
- Investors moved into cyclical, undervalued stocks that might benefit as the economy continues to improve.7 This activity pushed Value higher.
- “Defensive” factors were unloved by investors in February:
- The Low Risk factor experienced poor performance again last month. The factor’s two inputs showed directionally different performance, with Residual Volatility up 1.47% and Beta down -6.04%, underscoring the importance of design choices in factor construction. Read more on that here.
- Quality stocks underperformed their junkier counterparts, with the Earnings Variability and Profitability components leading the factor’s underperformance.
- The Momentum rally slowed in February.
- Crowding recovered last month after poor performance in January as hedge funds generally redeployed capital and increased leverage.8
- Small Cap companies outpaced large caps, boosted in part by vaccine progress and rising yields.9
References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.
3For example, the Bloomberg Commodity Index returned 7.31% over the period February 3, 2020 - January 29, 2021, according to Venn as of March 5, 2021.
4Many iPath Bloomberg SubTR ETNs (e.g., livestock, agriculture, softs) experienced a positive return in February, according to Venn as of March 5, 2021.
5Venn’s crude oil rolled futures contract was up 16% in February.
8Morgan Stanley Weekly HF Highlights February 26, 2021.
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