Is factor investing dying?

Back in October 2018 we raised the issue that the famous momentum strategy had potentially hit the point where it was arbitraged away due to more computing power and a wave of funds and ETFs utilizing the momentum factor. We highlighted the AQR Large Cap Momentum Style Fund and its failure to beat the S&P 500. Our main point back then and even more so today is that simple strategies will be arbitraged away.

Adding support for our view a January 2020 paper by Bouchaud et. al. Zooming In on Equity Factor Crowding argues that crowding effects are now very visible in Fama-French factors such as the momentum. The abstract says:

Crowding is most likely an important factor in the deterioration of strategy performance, the increase of trading costs and the development of systemic risk. We study the imprints of crowding on both anonymous market data and a large database of metaorders from institutional investors in the U.S. equity market. We propose direct metrics of crowding that capture the presence of investors contemporaneously trading the same stock in the same direction by looking at fluctuations of the imbalances of trades executed on the market. We identify significant signs of crowding in well known equity signals, such as Fama-French factors and especially Momentum. We show that the rebalancing of a Momentum portfolio can explain between 1-2% of order flow, and that this percentage has been significantly increasing in recent years.

In a Tweet thread yesterday we proposed that the value factor is also dead. Our main point is that the market has become so efficient now that no one-dimensional feature set can any longer produce alpha. The amount of computing power available and access to fundamental data and methodology agreement on what is the value factor on top of many funds and ETFs using the value factor has eroded the signal. The chart below shows the 5-year rolling mean monthly return between value and growth stocks. Since the financial crisis in 2008 value investors have been in one long pain trade due to massive underperformance by financials and energy stocks.