Why Momentum, Value, Carry, and Trend Strategies Struggled in 2016
Summary
The document discusses possible reasons systematic factor strategies underperformed across regions and sectors in 2016. The response proposes several market conditions that could have hurt returns. Sharp sell-offs followed by strong rebounds can challenge momentum and trend approaches: positions may be reduced near market lows just before prices recover. Higher correlations among stocks and across asset classes can reduce return dispersion, making long-short strategies harder to run profitably. Small differences in global interest rates may also constrain carry strategies, particularly in foreign exchange.
The answer additionally suggests that growing investment in systematic alternative risk premia may have increased competition and reduced available premia. These are presented as a personal, broad interpretation rather than a tested attribution. The document provides examples of market episodes and a qualitative mechanism for each proposed cause, but no return data, comparisons, or statistical evidence to determine their relative importance. Its observations are specific to the period under discussion and should not be treated as a general explanation for factor performance in other markets or years.
Key ideas
- Sharp reversals after sell-offs can cause momentum and trend strategies to exit near lows before rebounds.
- Higher correlations can reduce cross-sectional dispersion and hinder long-short strategies.
- Narrow interest-rate differences may weaken the opportunities available to carry strategies.
- More capital pursuing alternative risk premia may increase competition and compress returns.
- The proposed explanations are qualitative and are not tested against performance data.
Tags
Full text
# Factors not working # Factors not working It is no secret that most systematic (quantitative) hedge funds have been doing poorly in 2016. Factor targeting strategies (momentum, value etc.) are all underperforming in most regions and sectors. I was wondering what is going on in the world right now that is causing this. It is possible to come up with a story with hindsight as to what happened in a certain period in history. It is usually hard (or impossible) to verify such a story so I imagine answering this question is even harder. If the answers are bound to be too subjective for this site, I can try to adapt the question. ## Answer by MGL (score 3) https://quant.stackexchange.com/a/31174 In addition to momentum and value strategies you mentioned, some other common factor-based strategies are carry, trend (i.e. time-series momentum). As a very general (and subjective) answer, I personally think there have been a number of changes in capital markets in the recent couple of years, that adversely affect the returns of these kinds of strategies. Some of them are: i) The markets have not have very strong trends. Instead there have been large sell-offs followed by strong rebounds as seen in August 2015, Brexit, etc. These have been very challenging for momentum and trend strategies, as they go in with a lot of risk, only to sell it off near the bottom, just as markets are about to rebound. ii) Markets have been generally more macro driven with increasing correlations within stocks and also between asset classes. In general, little dispersion among asset returns, which means that many long-short strategies are suffering. iii) Small differences in global interest rates meaning hard time for carry strategies (especially in FX, but also in other asset classes). Another reason might be increased interest in systematic alternative risk premia strategies, leading to a more competitive market and lower risk premia. edit: It will definitely be interesting to see if there will be other, more systematic answers to this.
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