Let’s begin our January 2024 report by sharing the performance of the Two Sigma Factor Lens for the month.
Exhibit 1: Two Sigma Factor Lens Performance
Momentum: Our Momentum factor had one of its best months in its history, up close to 7% on the month. Performance benefited from the rally seen in tech amid strong earnings from big names. Broadly speaking, tech companies continue a relative upward price trend on the prospects of lower future borrowing costs.
Crowding: Our Crowding factor goes short US stocks with high residual short interest and long those with low residual short interest. As a result, positive returns this month indicate that short bets paid off above and beyond what can be found in other equity style exposures. While there is a positive return premium associated with our Crowding factor historically, we have seen an accelerated trend in positive performance beginning in mid February of 2021. Short sellers are sometimes thought to represent an informationally-advantaged group in the aggregate. As a result, recent performance trends in our Crowding factor may indicate that easier-to-identify and/or higher quality information has been broadly available to inform short positions.
Exhibit 2: Crowding Factor Cumulative Return
Source: Venn by Two Sigma
Foreign Currency: We write our performance reports using our USD factor lens, which means that negative returns from our Foreign Currency factor imply foreign currency depreciation relative to the USD. Notably, this factor attempts to remove overlapping risks associated with Equities, Commodities, Credit, and Interest Rates via residualization. As a result, -2.03% performance in January communicates a more pure and independent representation of relative foreign currency depreciation vs the USD than might be found in a typical US dollar index exposure. USD appreciation was in part driven by expectations for slower than expected rate cuts in the US.1
Emerging Markets: All three building blocks for this factor (equity, debt, and currencies) were down this month before applying our residualization process. Recent negative sentiment has stemmed predominantly from various economic issues in Chinese markets.2 However, it's worth noting that our EM factor has been trending downwards as far back as 2010, and historically we have found that there is not a return premium associated with our more pure EM factor.
Exhibit 3: Emerging Markets Factor Cumulative Return Since 1997
Source: Venn by Two Sigma
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