The period from 2017 to September 2020, known as the “quant winter,” was the worst for the factors as far back as they have been computed—1963. Value got killed, size and conservative had terrible returns, and robust delivered only anemic results. Only momentum did well. Things reversed in September 2020, with the first four factors delivering exceptional returns, and momentum losing.
Fama-French factor portfolios are not meant to be held as stand-alone investments, but to be added to an equity index fund. A portfolio consisting of an equity index plus 20% of each of the factors outperformed the market by 4.8% from 2000 to 2016, but reversed that to 4.7% underperformance from 2016 to September 2020. It roared back to 15.3% outperformance since. (You can loosely think of this as a portfolio that double-weights stocks in the top 30% of all five quant factors, holds zero of stocks in the bottom 30% of all five quant factors, and has intermediate weights of stocks with mixed quant signals.)
Quant mutual and hedge funds use much more sophisticated factor strategies, and some non-factor strategies as well. Nevertheless, it’s usually true that when Fama-French factors are doing well, quant is thriving, and when Fama-French factors falter, quant has troubles.
While past performance is no guarantee of future results, market regimes do seem to persist in the medium-term. Looking at public mutual funds it’s a bad time to be picking stocks, but long-short equity hedge funds seem to be doing all right. Macro funds had a mediocre time from 2016 to September 2020, and quant funds a terrible one. Global macro reverted to historical mean, quant funds seem to be enjoying an exceptional run.
While I have no crystal ball, macro factors like inflation, Federal Reserve actions, midterm elections, Ukraine, energy, the euro and China seem likely to drive markets for at least the remainder of 2022. It seems to me like a good time to try to be on the right side of global economic forces rather than a time to get into the weeds of individual stock prospects.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of The Poker Face of Wall Street. He may have a stake in the areas he writes about.