Why Big Growth Stocks Dominated the 2018–2020 Quant Factor Drawdown
Summary
This review of factor performance during the 2018–2020 quant crisis examines why diversified equity strategies struggled. It analyzes standard size, value, investment, profitability, and momentum factors, alongside portfolios formed by sorting stocks on size and factor characteristics. The central finding is that the strongest returns clustered in the largest, most expensive growth stocks. Large-cap profitability and momentum appeared helpful largely because they carried exposure to those growth stocks, while small caps broadly lagged.
The article compares the episode with earlier value drawdowns, when momentum often offset losses and smaller stocks more often held up. It also discusses an earlier quant crisis driven primarily by momentum reversal. The evidence comes from historical factor and portfolio returns, including long-short factors and market-relative portfolios, so the conclusions depend on sample periods, portfolio construction, and the unusual regime examined. The authors argue diversification can reduce single-factor damage but cannot ensure positive performance in every market environment.
Key ideas
- During the 2018–2020 episode, the strongest relative performance was concentrated in the largest and most expensive growth stocks.
- Large-cap profitability and momentum exposures largely reflected implicit exposure to large growth stocks.
- Small-cap weakness made the period especially difficult for strategies tilted toward smaller companies.
- Earlier value drawdowns often differed because momentum or size effects helped offset value losses.
- Historical factor diversification can mitigate losses but cannot guarantee positive returns in every regime.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.