By Yazann Romahi and Garrett Norman via Iris.xyz

In brief

  • Equity factor performance was consistent with trends from 2017, as both equity value and equity size extended drawdowns over the quarter.
  • Merger arbitrage suffered amid dramatically more volatile markets, but our expanded suite of event-driven factors posted gains in March, closing the quarter in a strong position and largely offsetting losses from January.
  • Macro momentum factors struggled as several markets reversed over the quarter. Carry factors were positive, albeit minimally.
  • We believe in diversifying across a broad range of compensated factors while minimizing exposure to uncompensated risks as we move through the latter part of the economic cycle.

OVERVIEW

Most of the factors that we favor suffered in a quarter singed by a violent shift in volatility regimes. Despite still-healthy economic growth, equity markets moved rapidly from a rally that was deemed both “euphoric” and a “melt-up” straight into correction territory. The shift occurred amid inflation fears and a technical sell-off that saw the CBOE Volatility Index (VIX) experience its largest-ever single-day spike. Additionally, U.S. Treasury yields increased by more than 50 basis points (bps) intra-quarter, reflecting both concerns about inflation and hawkish Federal Reserve rhetoric. Late in the quarter, those gains were reversed. A broad range of factors sold off over this period, across both asset classes and styles, with diversification providing limited benefits (Exhibit 1). On closer examination, however, the decline across factors was asynchronous and behavior was markedly different from that in earlier periods of factor crowding, such as the Quant Crisis of 2007. (We explore this subject in our March 2018 white paper, “Far from the Madding Crowd: Factor Investing Through the Cycle”.)

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