From Quiver Quantitative:

Wall Street’s quantitative analysts are facing a new era of investing with increasing competitive cash yields. Most long-short factor trades in equities and main quant factors in credit underperformed in 2023. This is mainly due to roaring inflation and rapid rate hikes reintroducing more significant market swings. The Federal Reserve’s aggressive monetary tightening has pushed short-term yields above 5%, making it increasingly difficult for strategies to outperform. Quants are now being forced to reassess their strategies with cash becoming a competitive investment option. This shift is reshaping market dynamics and investor expectations, which is challenging the reign of factor strategies in both equities and credit. Technology megacaps and volatile narratives are further complicating factor-driven bets, resulting in disappointing performance across many categories. Despite the difficulties, the top 10 cross-asset risk premia hedge funds tracked by Societe Generale achieved a 6% rise in 2023, while equity hedge funds gained 7% in a PivotalPath index..gridy.

In the credit market, 2023 marked the first year since at least 2012 when all quant factors tracked by Goldman underperformed cash. The underperformance was partly due to a large portion of investment-grade bonds yielding less than cash, making it challenging to generate high returns. The frequent market narrative shifts between recession fears and a soft landing further complicated the situation, creating volatility and uncertainty for quants. Therefore, quants are now forced to demonstrate alpha and refine their models to weather the new rate environment.



Read more: Wall Street Quants Struggle as Cash Returns Outshine Factor Trades