Venn by Two Sigma February 2025 Factor Performance Report: Active Equity Markets for Institutional Investors

Written by Christopher Carrano | 14 March 2025

Exhibit 1: Two Sigma Factor Lens Performance in February

Source: Venn by Two Sigma. The median and percentile columns measure the performance of each factor in the Two Sigma Factor Lens relative to the entire history of the factor in USD, using monthly data for the period August 1998 - February 2025

Equity Styles: Venn’s Equity Styles are global, long/short, and equity beta neutral.¹ In February, five out of six were in the top or bottom 20% of their historical monthly returns. Low Risk and Value were positive, while Crowding, Quality, and Small Cap were negative.

Low Risk and Value: Generally speaking, these factors benefitted from similar themes and positioning, partly evidenced by their comparable net sector allocations to begin the month (Exhibit 2).

Both factors were net short the Information Technology sector, which struggled amid tariff talks and broader market volatility. Notably, NVIDIA, often considered the AI barometer for equities, slid despite a strong earnings release.² Weakness in this sector provided tailwinds for both Low Risk and Value, given their net short positions.

Exhibit 2: Low Risk and Value Net Sector Positioning to Start February

Source: Venn by Two Sigma

While it’s true that both Value and Low Risk were net short Information Technology in February, Value compares stocks based on their price relative to fundamentals, and Low Risk compares stocks based on risk. As a result, the actual securities they are long or short, and at what magnitude, may differ meaningfully. This is evidenced by both having roughly 1.3% in positive return sourced from Information Technology in February, despite a net short position difference of around 11.5%.

Crowding: This factor tends to have much lower volatility than the other Equity Styles, making its -0.30% return stand out historically. Negative return implies that U.S. stocks with high residual short interest outperformed those with low residual short interest, contrary to historical trends. As we see in Exhibit 3, historically our Crowding factor has been positive, indicating that highly shorted stocks have indeed experienced relative underperformance.

Put another way, in February, the aggregate views of institutional investors (as represented by short interest), above and beyond other Equity Styles, led to negative returns.

Exhibit 3: Crowding Performance Historically

Source: Venn by Two Sigma

Quality: The negative return of Quality in February means that lower quality equities outperformed relatively higher quality ones. Moving one layer deeper, underperformance occurred as a result of highly leveraged companies outperforming companies with lower levels of debt.

The below chart shows the February performance of three independent versions of our Quality factor:
- one that only considers leverage (orange)
- one that only considers profitability (blue)
- our actual Quality factor, measuring stocks on both of these characteristics (gray)

As we can see, a portfolio that goes long lower-leveraged stocks and short higher-leveraged stocks underperformed in February.

Exhibit 4: February Performance of Different Quality Portfolios

Source: Venn by Two Sigma

Small Cap: Investors exposed to our long/short and beta neutral Small Cap factor have historically not been rewarded. This fact is especially salient in today’s markets, which many consider to be driven by mega-cap companies. This encourages one to be thoughtful about weighing monthly market events against more sustaining market themes.

For example, in the last 60 months, or five years, our Small Cap factor has been positive only 38% of the time (Exhibit 5). Among Equity Styles, this lack of consistency is rare. As we see below, no other factor has been positive in less than 50% of these months.

Exhibit 5: Percent of Positive Months Over the Last Five Years

Source: Venn by Two Sigma

Credit: This factor captures global corporate and high yield bond exposure, currency hedged. What’s more, we decorrelate this factor with Equity and Interest Rates, leaving what is leftover to represent a purer exposure to credit risk.

Stellar performance in February indicates that credit risk was meaningfully rewarded for the month, after accounting for movements in Equity and Interest Rates factors. Market participants pricing in lower corporate default risk may come as a surprise to those who consider the current landscape to be an uncertain one.

Fixed Income Carry: This factor goes long high yielding 10-year sovereign bonds and short low yielding ones, measured across six developed countries by their term spread. As has commonly been the case as of late, performance for this factor was meaningfully driven by short positioning in the U.S. and long positioning in Japan. In February, the U.S. 10-Year yield went from 4.57% to 4.23%³ while the 10-Year JGB went from 1.25% to 1.37%.⁴ As a result, both of these positions dragged meaningfully on returns in February.

In the U.S., it may be the case that yields are falling as investors grapple with economic data suggesting a slowing economy.⁵ In Japan, markets seem to still be digesting what the Japanese yield curve looks like post yield curve control, with some expecting more rate hikes.⁶

References

¹ One exception to the global aspect of our Equity Styles is Crowding, which only includes U.S. securities.

²https://www.investopedia.com/dow-jones-today-02272025-11687427

³ https://www.cnbc.com/quotes/US10Y

⁴ https://www.cnbc.com/quotes/JP10Y-JP

⁵ https://www.cnbc.com/2025/02/25/us-treasury-yields-investors-look-toward-key-home-price-data.html

⁶ https://www.reuters.com/markets/rates-bonds/boj-isnt-fretting-much-about-rising-bond-yields-now-2025-02-21/

References to the Two Sigma Factor Lens and other Venn methodologies are qualified in their entirety by the applicable documentation on Venn.

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.

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