Factor Olympics 2025

And the winner is…

January 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Momentum was the best, and low volatility was the worst-performing factor
• Long-short factor investing generated strong excess returns
• Long-only, smart beta factor investing did not

INTRODUCTION

We present the performance of well-known factors for 2025 as well as over the last decade. We have started to include the growth factor, which, according to academic research, has generated negative long-term returns but is a widely followed investment style.

METHODOLOGY

Our factors are constructed from 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 are rebalanced monthly, and transactions incur a 10-basis-point cost. Stocks are selected on the following metrics:

• Value: A combination of price-to-earnings and price-to-book multiples
• Size: Market capitalization
• Momentum: Total return over the last 12 months
• Low volatility: Volatility over the last 12 months
• Profitability: Net income-over-equity
• Leverage: Debt-over-equity
• Growth: A combination of sales-per-share and earnings-per-share over the last three years

FACTOR OLYMPICS: EXCESS RETURNS

The table below ranks long-short factor performance over the past 10 years. Beyond showing performance, it illustrates the sharp year-to-year rotations in factor profitability, underscoring the value of diversifying across multiple factors.

Momentum was the top-performing factor in 2025, continuing its 2024 leadership amid strong demand for outperforming, high-growth stocks such as NVIDIA and Meta Platforms. Conversely, the low-volatility factor dropped from a top performer in 2024 to the worst performer in 2025.

An equal-weighted portfolio of all factors, excluding growth, which is not supported by academic research, would have returned -0.3% before management fees.

Source: Finominal

TRENDS IN FACTOR PERFORMANCE

We observe that the most popular equity factors failed to exhibit strong trends in 2025, with the notable exceptions of momentum, which performed strongly, and low volatility, which underperformed. However, these patterns reversed in the fourth quarter of 2025, when momentum stocks lagged low-volatility stocks.

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 of 2025, EQLS was liquidated, highlighting investors’ limited patience with alternative strategies that do not quickly generate positive returns. We would expect QIS to follow soon, given its exceptionally poor 2025 performance, where it generated a loss of -37.7%, compared to +12.4% for AQR’s Style Premia Alternative Fund (QSPRX). QMNIX, FLSP, and VMNIX have also generated attractive returns in 2025.

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. The momentum, growth, and value factors generated positive returns in their long-short versions, but not in long-only constructs. Stated differently, shorting underperforming, low-growth, and expensive stocks was profitable in 2025.

However, we also observe that low-volatility stocks underperformed significantly, consistent with the poor returns of the long-short low-volatility factor (read Market-Neutral versus Smart Beta Factor Investing).

Source: Finominal

FACTOR CORRELATIONS

The 12-month correlation analysis reveals several strong positive relationships, including value & low volatility, profitability & low volatility, and growth & momentum. It also highlights notable negative correlations, such as value & momentum, value & low leverage, and size & profitability. Many of these relationships are structural rather than temporal – for example, cheap stocks often underperform and are frequently associated with high leverage.

Source: Finominal

FURTHER THOUGHTS

We previously highlighted the significant differences between long-short and long-only (smart beta) factor investing, where the former generated strong returns in 2025, while the latter did not. However, it is also worth noting that craftsmanship still matters, as evidenced by the strong performance of AQR’s products relative to the abysmal performance of Simplify Asset Management’s QIS.

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.