Chaos in Factor Land Puts Quants on Hunt for Accidental Exposure

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The sun was just rising over New York on Nov. 9 when an announcement from Pfizer Inc. set in motion what would be one of this year’s heaviest days of volume in the U.S. stock market — and one of the most shocking sessions in recent memory for the quants who trade in it.

The surprising success rate of a coronavirus vaccine trial from Pfizer and its partner triggered a massive reaction in stocks. For investors who carve the equity market into assorted characteristics that drive the performance of share prices, it looked like this: Factors such as momentum and growth that had helped lead this year’s rally were crashing, while under-performing groups like value and small caps were soaring. Could the vaccine be a complete game changer — the catalyst to start a reversal in the types of equity factors that perform the best?

Not so fast, says an executive at one of the most-influential companies in this realm of investing. Yes: certain factors did play a role in the massive outperformance of small caps that day. But contrary to popular belief, none of them were the “size factor,” the one everyone believed was driving the surge in smaller companies, according to Roman Kouzmenko, executive director of core equity research at MSCI Inc. Likewise, the value factor had little to do with a surge in a gauge of value stocks.

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