January 2022, Extreme Value Factor Rotation -Dispersion Performs Well

Introduction

At the end of 2021, we conducted research that indicated a generic dispersion strategy could act well as a hedging agent against unwanted exposure to factor rotation.

In a perfect storm for out-of-sample testing, the extreme rotation into the Value factor occurring this January validates the hypothesis of a dispersion strategy performing well in periods of factor rotation.

The Analysis

This workbook has two tabs. One shows the trailing three-month relative performance of four factor ETFs with self-explanatory names MTUM, QUAL, SIZE, and VLUE. The four names give six unique pairings, i.e. (MTUM - QUAL), (MTUM - SIZE), (MTUM -VLUE), (QUAL- SIZE), (QUAL- VLUE), and (SIZE - VLUE). We see the incredible out performance of Value over Quality with a day-by-day visualization peaking at over 11% by mid-month.

The second tab shows the performance of a generic dispersion strategy being positive for an astonishing 19 out of 20 trading days with an average of 1.9 Vega points of profit.

The graph represents the relative performance of trailing three-month returns for the six possible pairings of the four factor ETFs. The performance is indexed to start at zero on December 31, 2021.

The chart above shows the profitability of a full-replication dispersion strategy in January, 2022. Profitability (Y-Axis) represents the strategy return in Vega points.