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Research

Value, Momentum, and the Outlook for Market Neutral L/S

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Momentum stocks experienced a correction since Pfizer announced their Covid-19 vaccine results early November. Performance has nonetheless stabilized over the course of March, as the rebound in Value stocks has been persistent and started to be reflected in the Momentum risk factor. Yet, estimates of the correlation between Momentum and Value vary depending on the benchmark. Dow Jones Thematic indices or MSCI USA Value/ Momentum ones fail to reflect adequately the new correlation regime due to their quarterly or semi-annual rebalancing, which provokes inertia.

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Value, Momentum, and the Outlook for Market Neutral L/S
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Alternative strategies with a Momentum bias such as Market Neutral L/S performed reasonably well lately. They outperformed year-to-date, up +1.8% according to Lyxor Alternative UCITS Peer Groups. Such strategies use proprietary approaches to build Momentum exposures, with probably less inertia than the benchmarks discussed above. They thus appear to have an enhanced Value bias (see page 2), which is implied by their Momentum exposure.

Going forward, the near-term prospects for the strategy have marginally improved. The Momentum bias allows Market Neutral L/S to capture better economic prospects, now that the correlation with Value is increasing. For investors that are risk constrained, the low volatility features of the strategy coupled with the current cyclical bias are somewhat supportive.

But longer term, the strategy remains vulnerable to factor rotations as it is uncertain that the recent trend for value will last very long. And no market directionality will curtail their capacity to capture the economic rebound, with fundamentals back in favor. Market Neutral L/S are likely to keep underperforming other hedge fund strategies as showed by their track record over the last few years. At this stage of the business cycle, Event Driven, CTAs and Directional L/S look more attractive to us.

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