Value & Size Regain Favor Amid Cooling Risk Sentiment

Synopsis

This week’s Lenses reveal a rotation back into Value and Size factors amid cooling risk sentiment, while hedge fund crowding shows waning conviction in policy-driven and rate-sensitive themes as market positioning recalibrates around more durable macro narratives.

Lens 1: Surprise Metric

Our “Surprise Metric” reveals factor movements outside of their historical return distributions for different horizons (Surprise 1W, 1M, 3M columns below). Values above 1 (below -1) standard deviation suggest outsized strength (weakness) relative to history (data sourced from our open ecosystem of risk model providers).

Highlights

• Value Surprise Stands Out: The Value factor showed the strongest positive surprise in the fundamental category this past week, a sharp reversal from 3M ago when Growth led and Value lagged. The cooling impact of the pro-risk trade has pulled attention back to inflation and Fed policy—conditions less favorable for high-growth names. In contrast, improving economic data in the past week (e.g., jobs and sentiment) has supported Value-oriented sectors like Financials, Energy, and Industrials.
• Size Factor Strengthens: The Size factor surprise rebounded sharply this week, breaking its negative streak from the past 1M and 3M. This move reflects a re-trenching in investor preference toward large-cap stocks, likely driven by increased defensiveness as the recent risk-on rally shows signs of fading. Meanwhile, Beta and Momentum have cooled, giving back some of their recent gains.
• Positioning Factors Unwind: Positioning factor surprises like Quant Sentiment and ESG have weakened notably, turning negative after being positive 1M and 3M ago. This reversal suggests a technical unwind in crowded trades, as investors rotate out of previously favored names.

Lens 2: Thematic Crowding

This snapshot reveals thematic hedge fund exposure by measuring the beta of a Wolfe Hedge Fund Crowding factor portfolio to key market themes, calculated from residual return data. Higher beta indicates greater crowding in the theme, while lower beta suggests contrarian or avoided positioning to the theme. Data used for this analysis extends back to Jan 1st, 2024.

‍How to read this graph‍

Highlights

• Theme Volatility Concentrated in Select Areas: Most thematic betas are currently hovering near the top or bottom quartiles of their historical ranges. Themes with the widest distribution of outcomes—Rate Sensitivity, Health Innovations, and Cyclicals vs. Defensives—saw the most variation in hedge fund relevance over the past year. In contrast, US Democratic Policy exhibited minimal dispersion, suggesting it held little significance in portfolios, likely due to a muted political impact.
• Rate Sensitivity Becomes Less Relevant: The beta to the Rate Sensitivity theme has drifted toward zero, marking a notable deviation from its historical average. This points to a structural shift in hedge fund positioning, likely reflecting a consensus around a “higher for longer” rate environment, making interest rate exposure less of a differentiating alpha driver.
• Policy Themes Lose Steam: Thematic exposures to US Republican Policy and Global Tariffs have both fallen below their 25th percentiles, with the former nearing its historical low. This suggests hedge funds have already priced in the volatility from April’s tariff shocks and related policy noise. As a result, these themes appear less actionable, with reduced conviction around names linked to policy shifts.

For Further Discussion:

As you digest this week’s Lenses, consider further discussion on the following points:

• How aligned are our Value and Growth exposures with the latest factor surprises?
  Are we positioned to capture the recent resurgence in Value surprise while avoiding overexposure to fading Growth themes?
• As the risk-on rally cools, are our cyclical tilts appropriately sized?
  Do we have the right balance in cyclical factors like Beta and Volatility, or are we still positioned for a regime that may be losing steam?
• What portion of our portfolio is tied to fading policy themes?
  How exposed are we to themes like Tariffs and Republican Policy, which have seen a clear drop in relevance based on hedge fund positioning?
• Where are we leaning against consensus, and are we early or wrong?
  Which themes do we believe are mispriced relative to hedge fund consensus, and are our current contrarian tilts supported by a differentiated thesis?

Omega Point can help you surface and explore these questions with data-driven clarity. Reach out if you'd like to dig deeper into any of these themes.