Markets started 2023 by bouncing back. Our Equity Factor rallied 6.19% in January alongside our Interest Rates Factor, up 1.89%. 

While investors likely welcome positive returns for both equities and fixed income, it is interesting to note that they are still moving together, a theme consistent with 2022. Their high positive correlation continues to highlight the benefits of viewing risk through a factor lens made up of orthogonal factors. With that in mind, let’s take a look at January performance through the Two Sigma Factor Lens.


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 - January 2023


Most Equity Styles were Negative in January

  • Crowding, Quality, Low Risk and Momentum all suffered losses in the bottom 8% percentile or lower of their historical monthly returns.
    • Particularly interesting is the relationship between Crowding and Quality. Going back to 2008, the correlation between our Crowding and Quality factor is just 0.12, showcasing a reasonable independence from each other. However, that number rises significantly to 0.53 when considering only their downside correlation.1 This suggests that there may be a meaningful relationship between junk rallies (negative quality performance) and crowding underperformance, as seen in January. Why might that be?

      During risk-on junk rallies, investors may find issues with their short positions performing well, which in turn may cause further outperformance through short covering. If short positioning performs better than the stocks not commonly shorted (the long position), this would lead to crowding underperformance. 

  • Small Cap was up 2.41% and Value edged out a positive return as smaller capitalization stocks and cheap securities relative to their intrinsic value outperformed their short positions.


The “Truth” Behind Emerging Markets Performance

  • Emerging Markets (EM) performance appeared to be strong in January but careful analysis through our factor lens indicates there is more to the story.
    • EM equity was among the best performing asset classes in January, partially explained by easing Covid restrictions in China and a sign that Covid cases may have peaked, at least in the short term.2 Specifically, EM equities, bonds, and currencies were up 7.9%, 3.2%, and 2.6% respectively.3 An equal weighted exposure to these three EM components make up our raw EM factor input and was up 4.55% in January.
    • However, after Venn’s residualization process to strip out the effects of our Equity, Interest Rates, Credit, and Commodities Factors, our Emerging Factor was up a smaller but still respectable 0.82%.4 We believe this represents a more pure EM factor that is independent from other higher tier risk factors.
      • Investors typically associate EM with a long-term risk premium, but using our data back to 1995, an independent EM factor has returned an annualized -1.67% as of 1/31/2023. This suggests that an independent Emerging Markets factor has not rewarded investors historically. You can read more about related research in our paper on forecasting factor returns.

Interested in your portfolio's exposures to these factors?



1 Correlation figures using monthly data points. N=181 for correlation and notably a lower N=16 for downside correlation.


3 Measured by the MSCI Emerging Markets, Bloomberg Emerging Markets Aggregate and MSCI Emerging Markets Total Currency Indexes respectively.

4 Our Emerging Market Factor also residualizes against a global currency basket.



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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