How “Economic Scarring” and Low Rates Have Ravaged Quant Investors

Published on
August 5th, 2020
40 minutes

How “Economic Scarring” and Low Rates Have Ravaged Quant Investors

The Expert View ·
Featuring Joseph Mezrich

Published on: August 5th, 2020 • Duration: 40 minutes

After the high-profile bankruptcies and bailouts of the GFC, markets were left with the "economic scar" and the harsh reality that under poor economic conditions any company could go bankrupt. This combined with historically low rates caused corporate managers and market participants to focus on operational liquidity and economic health as seen through the lens of the yield curve. Joseph Mezrich, managing director at Nomura Securities International, argues that this dynamic has wreaked havoc on equity quant investors as factor premium, diversity, and consequently returns have collapsed post-GFC and become increasingly linked to curve shape. He also drills down specifically on value's dismal performance and the strong correlation between quant and value performance of late. Filmed on August 3, 2020.



  • DW
    David W.
    12 August 2020 @ 10:38
    Very interesting!
  • NF
    Neal F.
    7 August 2020 @ 12:37
    Outstanding interview from someone with a deep level understanding of factors and the impact of Econ environments on factor returns.
  • TP
    Timothy P.
    5 August 2020 @ 16:19
    More succinctly, the Fed never allowed institutions to fail that should've failed, and by cutting to zero has yet again suppressed volatility. This results in zombie companies, and select index stocks being supremely over-valued. Not a big surprise that diversification is dead, given that everything is trading off the massive monetary injections of the fed, or is too "dead" to trade in a worthwhile manner. I have zero sympathy for HFT, so I'm not exactly sad that the purveyors of "mirage" liquidity are having a hard time, including their quantitative cousins.
    • JL
      John L.
      6 August 2020 @ 22:04
      Is that capitalism?
  • MG
    Miguel G.
    6 August 2020 @ 19:11
    Nice job but I have a lingering question in that what happens to value if the 10 year for example reaches the zero bound? Granted we may eventually get some form of yield curve control but at such a depressed level, and assuming we don't see NIRP in the US wouldnt this be the perfect signal to look for to rotate from growth to value??
  • DP
    Duane P.
    5 August 2020 @ 18:16
    Great analysis! It would be interesting to see how the correlation changed with regard to nominal vs real rate or spread changes. Would a low growth but high inflation environment change this correlation? I think that a true growth story in the economy would bring back value but I'm not convinced that a low growth high inflation environment, which would cause an increase in rate spreads, would be positive for value stocks vs growth stocks.
    • WG
      Wade G.
      6 August 2020 @ 17:31
      I'm still in the throws of trying to process all of this, and Duane comes along and blows my mind. Very interesting and possibly critical question!
  • EL
    Emanuel L.
    5 August 2020 @ 19:05
    These are interesting correlations. I am a bit surprised that share buybacks did not come up since those are highly correlated to bond issuance in the value category.
    • JM
      Joseph M. | Contributor
      6 August 2020 @ 15:38
      Good point about buybacks. The abundant cash that growth companies were able to raise was undoubtedly relevant to their buyback activity. So, that was also a Fed induced phenomenon.
  • RJ
    Robert J.
    5 August 2020 @ 16:25
    100% great discussion and, unlike the current rate spread indication, this discussion is true value!!
    • JM
      Joseph M. | Contributor
      6 August 2020 @ 15:34
  • AS
    Alejandro S.
    6 August 2020 @ 06:56
    It all goes back to Value needing reflation and growth given its current sector composition; lots of oversupplied industries, and structurally challenged businesses like banking (no wonder value needs a steeper yield curve!).
  • MD
    Matt D.
    6 August 2020 @ 05:13
    Thanks Max and Joseph. Enjoyed this - very interesting.