By Yazann Romahi via Iris.xyz
Themes from the quarterly Quantitative Beta Research Summit
In brief
- Equity factors delivered mixed performance over the quarter and continue to experience reversals. The momentum factor led the way for much of the quarter, before the re-emergence of the so-called Trump trade boosted value and size.
- Merger arbitrage recouped August losses to close up for the quarter, but our broader set of event-driven factors continued to suffer.
- Macro carry factors performed well, particularly across commodity and FX markets. FX momentum, on the other hand, detracted from performance as changing expectations for monetary action upended market trends.
- Especially in today’s challenging, policy-driven environment, where the outlook is mixed across factors, we believe in diversifying across a broad range of compensated factors while minimizing exposure to uncompensated risks.
OVERVIEW
Policy as well as economic and fundamental data impacted pricing last quarter, and many of the factors that we favor were challenged, though there were pockets of strength (EXHIBIT 1). For much of 2017, the reflation/Trump trade from 4Q 2016 unwound, with yields and inflation expectations falling, the U.S. dollar declining and cyclical sectors and stocks underperforming. (High-tax company stocks have underperformed low-tax company stocks in 2017, a reversal of 4Q 2016, suggesting that politics likely played at least some role in these market dynamics). Conditions began to change in September.
The Federal Reserve (Fed) signaled that it would hike rates once more this year, and the Trump administration unveiled a tax overhaul. Markets priced in a 78% probability of a rate increase toward the end of September, up from 31%; yields and the U.S. dollar reversed course; and cyclical sectors and stocks began to once again outperform.
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