November 9-13, 2020 Venn Factor Performance Report

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 weekly data for the period March 1, 1995 - November 13, 2020.

The Venn team wants to help you understand, assess, monitor, and manage the factor risks and opportunities in your portfolios and investments, especially during relatively extreme market events such as those experienced last week. In doing so, we decided to do a one-off weekly Venn Factor Performance Report covering last week’s factor moves. Sign up for Venn Factor Performance Reports and other blog posts here.

Market Themes & Factor Performance Summary

• The equity style factors in the Two Sigma Factor Lens saw some of their largest weekly moves in history last week. In particular, there was a large rotation out of Momentum stocks and into Value stocks early in the week as positive news about a coronavirus vaccine buoyed Equity markets generally, and specifically those names that benefit from an economic reopening.¹ Meanwhile, technology stocks that have seen positive price momentum during the quarantine / lockdown period we’ve been in since the start of the global COVID-19 outbreak underperformed.

• The absolute spread between Momentum and Value last week was ~13%. This was a 5.5 standard deviation event compared to the last 25 years of market history.² Put another way, an event this large has only happened 0.3% of the time when looking at weekly periods going back to March 1995.
• Momentum’s severe, sudden underperformance relative to Value occurred amid the backdrop of a multi-year trend of Momentum outperforming Value. Here’s the YTD cumulative return difference between the two factors (i.e., Momentum returns - Value returns). We saw a similar convergence occur in early June when Value surged briefly, but then gave up those gains shortly thereafter. Before June though, we hadn’t observed this large of a weekly spread since April 2000.

• Two other equity styles saw notable pullbacks as well last week: Low Risk and Quality. The return spread between low-beta and high-beta stocks on Monday alone was 5%, with low-beta stocks underperforming. Additionally, lowly leveraged and highly profitable companies meaningfully underperformed their higher-leveraged and lower-profitable counterparts notably on Monday and Tuesday.
• Finally, the macro style factor Trend Following was also hurt in the reversal early last week with all asset classes except equities detracting from returns. In particular, the factor was generally positioned short commodities, which had suffered over the past year but posted a recovery last week, and long bonds, which had rallied over the last year but reversed last week.
• Venn can estimate how these factor moves impacted hedge funds generally by relying on Venncast estimates for the HFRI Fund Weighted Composite Index.³ Using this index, Venncast estimates that hedge funds generally were up ~70 bps on the week given their recent factor exposures and positive residual return.

REFERENCES

¹https://www.wsj.com/articles/global-stock-markets-dow-update-11-09-2020-11604888729

²Using weekly calendar returns from March 1, 1995 to November 13, 2020.

³To read more about Venncast, visit the FAQ here: https://help.venn.twosigma.com/en/articles/1145295-faq-venncast

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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