• None of the factors consistently generated positive performance during recent market crashes
  • However, almost any factor exposure would have increased the risk-return ratio of an equity-centric portfolio
  • Low Volatility and Mean-Reversion would have been most beneficial, Momentum least


A long time ago in a galaxy far, far away…markets declined. On our world, supported by an empire of collaborating central banks, market declines also seem distant. The last drawdown in the S&P 500 of more than 10% occurred in January 2016. Since then markets globally have been steadily increasing while exhibiting record low levels of volatility, which is also reflected in many other asset classes. The main exception are cryptocurrencies, the current wild west of capital markets. This quiet period within the equity markets is an ideal time to reflect on what strategies protected capital during previous market crashes, as these will certainly occur again. In this short research note we will analyse how to protect an equity-centric portfolio against market crashes with factor exposure by looking at recent case studies.


We’re going to focus on the six well-known factors (Value, Size, Momentum, Low Volatility, Quality & Growth) as well as short-term Mean-Reversion and focus on the S&P 500. The factors are constructed as beta-neutral long-short portfolios by taking the top and bottom 10% of the stock univers in the US and 5% for Mean-Reversion. Only companies with a minimum market capitalization of $1bn are considered and 10bps of transaction costs are included.

There is no standard definition for a market decline and we’re going to select arbitrarily some of the more meaningful market declines from the last 10 years.


In less than one year it will be the 10-year anniversary of the Lehman Brothers bankruptcy, which was one of the key events that defined the Global Financial Crisis (GFC). The S&P 500 lost 41% from September to December 2008, which seems almost unbelievable from today’s perspective of extremely calm and rising markets. The chart below shows the performance of the S&P 500 and the factors. Given that these are constructed as beta-neutral long-short portfolios we naturally expect them to protect capital over that period. Intuitively investors might expect Quality to perform, however, the performance is rather flat. Low Volatility and Momentum lost significantly until October, but recovered thereafter. The only strategy that would have made money was Mean-Reversion, benefiting from high volatility.

Source: FactorResearch