Investors may often assume quantitative strategies deliver returns uncorrelated to the broader economy. However, history, and specifically the analysis in our latest paper, The Quant Renaissance Part II, suggests otherwise. Many factor strategies carry significant, often invisible, macroeconomic sensitivity.
Before layering on more complexity, it is important to understand the simple relationships that have historically caught strategies off guard.
Value is an implicit inflation bet
The relationship between Value and inflation offers a clear example. While historically viewed through a fundamental lens, post-2020 data reinforces a structural reality, namely that Value behaves as a short-duration asset. These stocks typically generate immediate cash flows, whereas Growth companies rely on distant future earnings.
As inflation rises and discount rates climb, the long-duration cash flows of Growth stocks are disproportionately punished. Value, in relative terms, proves more resilient.
Our data across most developed markets confirms this sensitivity, with Value tending to outperform when inflation is rising and struggling when it falls. For investors, a "neutral" allocation to Value often functions as an implicit bet on higher inflation.
Figure 1. Value factors tend to outperform during inflationary periods while struggling when inflation falls (Long-short quintile spreads, sector-neutral)
Source: Man Numeric, S&P Capital IQ, Jan 2005 – July 2025.
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Momentum’s volatility trap
Momentum strategies face a different challenge, driven by market volatility. The strategy often faces its most severe test not during crashes, but during the subsequent recovery when volatility declines.
This tends to happen because Momentum is inherently backward looking. During a crisis, it accumulates defensive stocks that have performed well. When market stress dissipates and volatility collapses, such as the transition from stress to normalisation, risk assets often rally sharply. Momentum strategies are frequently left holding the defensive winners of the previous regime while the market pivots to recovery, which can potentially cause significant underperformance.
Figure 2. Momentum strategies historically suffer during periods of declining volatility (VIX).(Long-short quintile spreads, sector-neutral)
Source: Man Numeric, S&P Capital IQ, Jan 2005 – July 2025.
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The diversification illusion
These individual sensitivities explain why diversification often vanishes during stress periods. If a portfolio is unwittingly short volatility and long inflation sensitivity, seemingly distinct factors are likely to move more in lockstep. Recognising these single-factor risks is the first step toward the more dynamic, regime-aware frameworks we have detailed in our full paper.
Authors: Valerie Xiang, Portfolio Manager, Man Numeric and Ori Ben-Akiva, Director of Portfolio Management, Man Numeric.
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