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 - May 2021.


Market Themes & Factor Performance Summary

  • It was a relatively benign month for the returns of the factors in the Two Sigma Factor Lens. Only two factors (both equity styles) posted >80th or <20th percentile performance relative to their long-term histories:
    • The long-short Value equity style factor was the best performer last month with cheap stocks outperforming their more expensive counterparts. All four of the factor’s components were positive in May with Long-Term Reversal leading the pack. This brings the YTD return to 14.24%.
      • Although Momentum wasn’t down as much as Value was up, it was the worst performing factor in the lens in May. The two factors tend to have a negative correlation, and last month was no exception. The realized rolling 5 day correlation was -80% in May, compared with a -58% average since March 1995.
    • The Crowding factor continued its recovery from losses earlier in the year, bringing its YTD return positive. The factor performed well in the first half of the month, reaching a peak of 2.09% on May 13th, as heavily shorted stocks by the investment community underperformed stocks that were less heavily shorted. However, it reversed course mid-month, giving up about half of its gains to end the month up 1.10%.
  • Although the remaining factors were not notable performers, we’ll cover some of the interesting movements in the other factor categories last month:
    • Trend Following, a macro style factor, was a positive performer last month. The factor benefitted from continuing trends (either positive or negative) in currency, commodity, and equity markets. Trend following in fixed income markets was a detractor.
    • The global Equity factor delivered gains in May, supported in part by positive economic data and improving vaccine rollouts in many parts of the world. Upside was limited though, as investors were concerned that the positive economic data and higher inflation prints could cause central banks to begin reducing monetary support.1
      • The U.S. underperformed global equity markets on both an absolute and risk-adjusted basis, resulting in negative performance for Local Equity (a secondary macro factor) in the USD version of the lens.
      • A higher-than-expected inflation print in the U.S. helped boost the Local Inflation factor in the USD version of the lens. As mentioned in this blog post, the (unresidualized) factor benefits when inflation surprises to the upside, but otherwise tends to lose money due to being short the inflation risk premium in nominal bonds.
    • The residualized Credit core macro factor dropped in May. Note that the unresidualized composite of U.S. and European investment grade and high-yield bonds was up 0.33% last month. However, once Venn removed the overlapping risk that corporate bonds shared with the Equity and Interest Rates factors, the marginal Credit return was negative.
    • After outperforming earlier in the year, small cap stocks were outpaced by their large cap counterparts in May, resulting in a negative return for the Small Cap equity style factor.
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References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

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