Short Squeezes and Factor Updates

GameStop Hits the Reset Button

A fortnight ago, a consortium of retail traders banded together to buy shares of GameStop, a stock heavily shorted by hedge fund investors, pushing its price to astronomical heights and forcing some short-sellers to cover their positions in order to avoid further losses. The short squeeze was short-lived though, as the game ended, and the price of the stock fell back to earth over the following week. 

A popular way to implement factor exposures is by going long the top quartile of stocks and shorting the bottom quartile of stocks within an index with respect to a certain style factor. In the first paper below, Robeco draws a parallel between a short position gone wrong and a previous paper about whether factor investors should include the short leg of a factor position at all when constructing portfolios with specific factor exposures. The remaining papers in the list include an update on factor performance during 2020 and the relationship between factor premia and the stages of the economic cycle. 

When Equity Factors Drop Their Shorts – Again! (Robeco, 2021)

The recent short squeeze has called into question the practice of short-selling individual equities. Robeco takes this one stage further, highlighting a previous paper that explains why, when using factors to construct a market-neutral portfolio, the short side of the equation is more detrimental than beneficial.

Do Factors Carry Info About the Economic Cycle? Part 2 (FTSE Russell, 2021)

Our understanding of the economic cycle itself may need a reboot, due to post-GFC effects and quantitative easing. Should factor behaviour be linked to these secular regime shifts rather than cyclical growth stages?

What’s Up with the Momentum Factor? (Robeco, Feb 2021)

Three Robeco PhDs deconstruct the momentum factor's 2020 returns, looking at a variety of momentum signals. Because of the dispersion of momentum factor returns, they recommend an approach that is diversified across momentum signals.

Equity Factors in Q4 2020 (WisdomTree Investments, Jan 2021)

For compliance reasons, this paper is only accessible in the UK & Europe

WisdomTree Investments describes two distinct periods of factor performance during Q4: before the U.S. presidential election and afterwards. Small-caps and value stocks led the way during the latter period.

Hidden Factors: Exploring equity behaviour in 2020 (Federated Hermes, Jan 2021)

Federated Hermes reviews the extreme market events of 2020 and their effects on equity factor performance over the course of the year.

Factor Returns' Relationship with the Economy (Research Affiliates, 2020)

The author examines the historical returns of eight factors across market cycles (taking into account all four economic stages) in six different geographies.

Video: Indexing simplifies factor investing (S&P Dow Jones Indices, 2021)

This video from S&P Dow Jones Indices describes how ETFs and factor indices have democratised access to factors. They also provide an overview of factor premia and the basis for their existence.

Is a Regime Change Brewing in Factor Land? (FTSE Russell, 2021)

FTSE Russell looks at the potential reasons behind the rotation that occurred in Q4 from the momentum and quality factors to the small-cap and value factors.

Reasons for Quality as a Complement to Value (Wellington Management, 2021)

Portfolio managers and investment directors from Wellington Management explain that the quality factor has a low correlation to the value factor, it offers additional downside protection, and it can help to diversify a factor portfolio's industry exposures.