Themes from the quarterly Quantitative Beta Research Summit
- Factor performance was bifurcated over the quarter amid sharp market reversals.
- Equity factors were negative across the board; since 1990, this had happened only once before.
- Event-driven factors delivered generally positive returns, led by merger arbitrage, share repurchase and spinoff factors.
- Macro factors were led by carry, which drove gains across asset classes.
- We believe in diversifying across a broad range of compensated factors while minimizing exposure to uncompensated risks, even if the risk of recession has been pushed out on the horizon.
Risk assets surged to their best quarter in nearly a decade following a dismal year-end in which financial markets priced in increasing odds of a recession amid a range of economic, monetary policy and geopolitical concerns. The sharp reversal, which appeared to be driven by a dovish shift across central banks, led to bifurcated outcomes across the factors that we favor (EXHIBIT 1). Shifting crosscurrents negatively impacted each of our equity factors while event-driven and macro factors generally performed well. In fact, Q1 2019 was only the second time since 1990 when all four of our equity factors were negative (the other occurrence was Q1 2009, when markets bounced off of financial crisis lows). While prospects for economic growth are subdued and markets are projecting that the Federal Reserve (Fed) will cut rates before resuming a hiking path, it appears that the global economy has sidestepped a recession and that major economies will remain in late-cycle territory for some time to come. That backdrop has varying implications for factors.
Factor performance was bifurcated over the quarter
EXHIBIT 1: QUANTITATIVE BETA STRATEGIES LONG/SHORT FACTOR RETURNS
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.
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