Beta in Beta-Neutral Factors?

The illusion of uncorrelated returns

January 2023 Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Beta-neutral value, momentum, and low volatility factors are currently highly correlated to the S&P 500
  • The correlation is temporary rather than structural
  • Likely explained by the downturn in tech stocks that benefits these factors


We recently published our quarterly Factor Olympics report (read Factor Olympics 2022) which highlighted the best year for factor investing in the last decade.

Aside from the usual rotation in factors, we also observed that some factors exhibited the same trends as the stock market in 2022. Given that the factors are constructed beta-neutral, this is rather unusual, which we explore in this article.


In 2022, cheap stocks outperformed the stock market after almost a decade of underperformance. Given that this trend has established itself over more than 12 months, many value stocks have become momentum ones, which is highlighted by both factors exhibiting a similar performance in the last year. The low volatility factor also had a comparable performance as reflected in correlations of 0.71 to the value and 0.65 to the momentum factor.

However, more striking is that these three factors had the same trends in performance as the S&P 500. Each factor is constructed by taking the top and bottom 30% of all stocks in the US stock market ranked by their respective metrics, which results in a long and a short portfolio. These are rebalanced on a monthly basis and constructed beta-neutral so that the net beta of the long-short portfolio to the S&P 500 is zero. Given this, the returns are uncorrelated to those of the stock market (read Factor Construction: Beta vs $-Neutrality).