Factor Olympics 1H 2025
And the winner is…
July 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Only momentum generated meaningful excess returns year-to-date
- Value and small-cap stocks underperformed
- Market-neutral factor returns continue to be more attractive than long-only returns
INTRODUCTION
We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only present factors where academic research supports the existence of positive excess returns across market cycles and asset classes.
METHODOLOGY
Our factors are created by constructing long-short beta-neutral portfolios of the top and bottom 30% of stocks. Only stocks with a minimum market capitalization of $1 billion are included. Portfolios rebalance monthly and transactions incur 10 basis points of costs.
FACTOR OLYMPICS: GLOBAL EXCESS RETURNS
The table below shows the long-short factor performance for the last 10 years ranked top to bottom. The global series is comprised of all developed markets in Asia, Europe, and the US. Aside from displaying the factor performance, the analysis highlights the significant factor rotation in terms of profitability from one year to the next, highlighting the benefits of diversified exposure.
The low volatility and momentum factors have extended their winning streak from last year, but the low volatility factor lost almost all its gains in the second quarter of 2025. Only momentum has generated meaningful positive excess returns, while small caps have underperformed significantly.
A theoretical portfolio providing equal-weighted exposure to all five factors would have generated 0.2% before management fees.
Source: Finominal
TRENDS IN GLOBAL FACTOR PERFORMANCE
We observe a clear break in factor trends in early April when the U.S. government started the tariff war, amongst other unsound policies. However, for factors like quality, as expected, this proved positive, while negative for others like the low volatility factor. The main benefactor was the momentum factor as it continued its upward trajectory from the first quarter.
Source: Finominal
PERFORMANCE OF LONG-SHORT MULTI-FACTOR PRODUCTS
Only a handful of liquid alternative mutual funds and ETFs offer pure long-short factor exposure, as seen in academic research. Despite numerous fund liquidations over the past decade, Simplify Asset Management introduced two new products in 2023: the Simplify Market Neutral Equity Long/Short ETF (EQLS) and the Simplify Multi-QIS Alternative ETF (QIS), both designed to provide exposure to equity and cross-asset factors.
However, in the second quarter, EQLS was liquidated, highlighting investors’ limited patience with alternative strategies that are not quickly generating positive returns. QIS will likely follow soon given it’s poor performance.
In contrast, AQR’s Equity Market Neutral Fund (QMNIX) and Style Premia Alternative Fund (QSPRX) maintained their strong returns from the first quarter.
Source: Finominal
SMART BETA EXCESS RETURNS
Although investors should allocate to factors constructed as long-short portfolios given that these offer high diversification benefits, most invest via long-only smart beta ETFs (read Smart Beta vs Alpha + Beta). Following the money, we highlight the excess returns generated from investing in smart beta ETFs in the US, which represents a universe of 160+ products and approximately $800 billion of assets under management. We also show the performance of the growth factor, which is popular with investors but is not associated with positive excess returns over time (read What Are Growth Stocks?).
We observe that there are some differences, but also some similarities between long-short and long-only factor investing. Value and small-cap stocks underperformed, mirroring the negative factor returns. However, opposite signs in returns are observed for the low volatility and quality funds (read Market-Neutral versus Smart Beta Factor Investing).
Source: Finominal
FACTOR CORRELATIONS
The 12-month factor correlations have become more extreme again, with low volatility and value showing a strong positive correlation – reminiscent of the tech bubble in 2000. As history showed, that bubble eventually burst, paving the way for strong performance in cheap, low-volatility stocks. While history may not repeat exactly, it often echoes.
Source: Finominal
FURTHER THOUGHTS
Factor investing remains the only academically supported way to achieve outperformance over the medium to long-term. However, after analyzing many multi-factor portfolios created by institutional investors over the last years, we believe investors do not view factor offsetting critically enough (read Factor Exposure Analysis 114: Factor Offsetting).
Combining too many factors simply leads to these offsetting each other, and then results in plain-vanilla equity exposure at expensive fees. Investors either need to dynamically allocate to factors, or choose fewer factors. Too many flavors ruin the dish.
RELATED RESEARCH
Market-Neutral versus Smart Beta Factor Investing
Factor Optimization via ETFs
Smart Beta ETF vs Customized Factor Portfolios
Factor Exposure Analysis 114: Factor Offsetting
Improving Smart Beta Attribution Analysis II
Quality in Small versus Large-Cap Stocks
The Illusion of the Small-Cap Premium
Shorting Lousy Stocks = Lousy Returns?
Higher Volatility, Higher Alpha?
Outperformance Ain’t Alpha
Improving the Odds of Value Investing
The Value Factor’s Pain: Are Intangibles to Blame?
Smart Beta vs Alpha + Beta
How Painful Can Factor Investing Get?
GARP Investing: Golden or Garbage? II
Are Low-Risk Stocks Really Low-Risk?
ABOUT THE AUTHOR
Nicolas Rabener is the CEO & Founder of Finominal, which empowers professional investors with data, technology, and research insights to improve their investment outcomes. Previously he created Jackdaw Capital, an award-winning quantitative hedge fund. Before that Nicolas worked at GIC and Citigroup in London and New York. Nicolas holds a Master of Finance from HHL Leipzig Graduate School of Management, is a CAIA charter holder, and enjoys endurance sports (Ironman & 100km Ultramarathon).
Connect with me on LinkedIn or X.
