Themes from the quarterly Quantitative Beta Research Summit
- Factor performance was negative, on balance, over a quarter marked by slowing economic growth, trade tensions and dovish central bank rhetoric.
- Equity factors were led by momentum as investors resumed their chase for growth in a low rate environment.
- Event-driven factors were mixed, with merger arbitrage continuing to perform well while other factors gave back gains from earlier in the year.
- Macro factors were challenged by whipsawing commodity markets.
- We believe in diversifying across a broad range of compensated factors while minimizing exposure to uncompensated risks, and continue to find opportunities across markets.
Risk assets extended their gains in the second quarter despite subtrend economic growth, ongoing trade tensions and declining earnings forecasts as markets increasingly priced in expectations of monetary accommodation. While this backdrop supported the equity momentum factor, other equity and event-driven factors that we favor were left behind as investors generally chased mega cap growth stocks and stretched multiples on expensive names, paying little heed to underlying fundamentals (EXHIBIT 1). Fixed income yields fell precipitously over the quarter amid dovish central bank posturing and mixed data prints, which supported fixed income momentum and carry factors. However, whipsawing commodity markets proved challenging for macro factors more broadly. As we noted last quarter, major economies may remain in late-cycle territory for some time to come and prolong current market trends. However, we see valuations for certain factors reaching extreme levels and expect eventual reversals.
Factors generally suffered over the quarter, with the exception of equity momentum
EXHIBIT 1: QUANTITATIVE BETA STRATEGIES LONG/SHORT FACTOR RETURNS
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