Markets once again tumbled in September as equities and bonds continued to fall together. Investors have typically relied on diversification of these asset classes in times of market stress, as historical correlations have often been negative. Thus, the positive correlation between equities and bonds has posed a challenge for capital allocators to navigate.

Equities and interest rates act as the bedrock of our Two Sigma Factor Lens. This is because many other factors account for exposure to, and the performance of, these macroeconomic factors on the path to statistical independence. Let’s take a look at the performance of our common risk factors during the month of September.

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 - September 2022


Highlights from September

  • Venn’s Equity Factor, which is represented by global currency hedged equities, was down -8.55% as inflation continued to be higher than expected.1 This factor is down -19% from its January 4th high. This puts it just shy of a technical bear market, which would be official at -20% from its recent peak. 
  • Our Interest Rates Factor, which is long global currency hedged bonds, had one of its worst months going back to 1995,2 second only to August 2022. Put another way, the last two months are the worst in its history.
    • Poor performance was accompanied by unprecedented rate hikes from central banks to fight inflation. Among the banks associated with G10 currencies, there was a total of 550 basis points of interest rate increases.3 
  • Fixed Income Carry is a macro style factor that is designed to have exposure to high-yielding 10-year bond futures funded by low-yielding bond futures. It was up over 4% for the month which is in the 98th percentile of its return history.
    • The raw input for this factor, which considers the term spread and the roll down return, was up 1.75%. After removing the negative return attributed to moves in our interest factor, it was pushed meaningfully higher to its 4.11% return. 
  • Both Momentum and Trend Following act as “chameleon factors,” where if trends persist long enough, they can begin to adapt and benefit.
    • For example, Momentum can begin to favor stocks that might relatively benefit from rising interest rates, a rising USD and higher inflation. Momentum was up 0.83% in September.
    • Unlike Momentum, Trend Following will be net long or short within asset class sleeves based on absolute trending performance. This macro style factor returned just shy of 4%, with its major benefit coming from a short position in its fixed income sleeve.
      • Trend Following has shown to be a powerful market hedge, up over 20% YTD as the best performing factor in our lens. 
        • Long term historical correlations with our Equity and Interest Rate Factors are -0.18 and 0.23 respectively,4 but have been -0.51 and -0.71 year-to-date. 


Interested in your portfolio's exposures to these factors?


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



2 3/1/1995 marks the broad common period for the Two Sigma Factor Lens.


4 Beginning 3/1/1995, marking the broad common period of the Two Sigma Factor Lens.


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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