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Market-Neutral versus Smart Beta Factor Investing

Don´t drop your shorts.

Nicolas Rabener
10 min read
21 Oct 2024

SUMMARY

  • Smart beta multi-factor ETFs in the U.S. have consistently generated negative returns over the last 10 years
  • In contrast, market-neutral multi-factor funds are at record highs
  • The discrepancy can be explained by the short side contributing almost all positive returns

INTRODUCTION

Quants have been calling the period between 2017 and 2020 the Factor Investing Winter as popular equity factors like value and momentum generated consistently negative returns. Funds like AQR`s Equity Market Neutral Fund (QMNIX), which provides exposure to these factors in a long-short format, lost more than 90% of their assets under management as investors lost their faith in the strategy (read Factor Investing Is Dead, Long Live Factor Investing!).

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