Monthly QIS Review - March 2025

Executive Summary

March 2025 was marked by meaningful dispersion across quantitative investment strategies (QIS), driven by regionally divergent equity market dynamics, a weakening U.S. dollar, rising interest rate volatility, and a pronounced uptick in credit risk. Low volatility, liquidity, and value strategies performed well in this risk-aware environment, while growth, momentum, and credit-sensitive strategies lagged. Cross-asset dislocations reinforced the value of diversified QIS allocations.

Market Environment

Global equities were volatile in March 2025, with regional divergence reflecting heightened macroeconomic uncertainty. U.S. stocks declined further on escalating tariff concerns, pushing the S&P 500 into correction territory and down 4.6% for the quarter—its weakest Q1 since 2022. European equities proved more resilient; while the STOXX Europe 600 dropped 2.7% in March, it still advanced 5.2% for Q1, supported by Germany’s fiscal expansion and investor rotation away from U.S. risk. Asian markets were mixed: Chinese equities rebounded sharply (the Hang Seng Index surged ~18% YTD), while Southeast Asian indices underperformed amid trade and growth concerns. Overall, MSCI’s all-country world index was flat year-to-date, concealing stark regional contrasts.

In fixed income, safe-haven bonds rallied as investors adjusted to slower growth prospects. U.S. Treasuries returned +2.7% in Q1, with the 10-year yield falling over 20 bps. Meanwhile, European yields rose—driven by Germany’s fiscal pivot—with the 10-year Bund yield gaining 40 bps. Credit markets weakened, with widening spreads causing corporate bonds to lag Treasuries. Both investment-grade and high-yield bonds saw negative returns late in the quarter, reflecting increased risk aversion.

Currency markets also shifted meaningfully: the U.S. dollar weakened, losing ~4% over Q1 amid Fed rate cut expectations, which supported the euro and yen. Volatility climbed notably, with the VIX breaching 20 in March and the VVIX nearing triple digits, suggesting elevated—but not extreme—hedging demand. This uptick in volatility, alongside declining U.S. rates and a weaker dollar, created a more cautious investment landscape heading into Q2 2025.

QIS Performance Highlights

Equities Low Volatility (3.60%) led all QIS composites, benefiting from a flight to quality and defensive positioning amid increased volatility. This strategy captured investor preference for stable, lower-beta stocks during the U.S. equity market correction.

Equities Liquidity (2.17%) also performed well, driven by investor demand for large-cap and highly tradable stocks amid stress in smaller capitalization names.

Equities Value (1.98%) delivered robust performance as investors rotated into undervalued sectors, particularly in Europe and select emerging markets.

FX Value (1.84%) captured opportunities from the broad-based U.S. dollar depreciation. The weakening dollar favored valuation-driven FX strategies, especially long EUR and JPY exposures.

Rates Liquidity (1.50%) benefited from declining U.S. Treasury yields and reduced rate volatility, supporting strategies that allocate risk based on market depth and transactional capacity.

On the downside, Equities Growth (-5.97%) was the worst performer. The strategy was hit hard by the continued sell-off in high-duration stocks and risk-off sentiment, particularly in U.S. tech and consumer sectors.

Credit Carry (-3.36%) struggled as credit spreads widened, undermining carry-based exposures in both investment-grade and high-yield credit.

Credit Momentum (-2.96%) and Credit Value (-2.32%) also posted losses, reflecting broad-based underperformance in corporate bonds relative to government debt.

FX Momentum (-2.13%) faced difficulties as lack of directional trends and short-term reversals in currency markets undercut trend-following models.

Performance by Bucket

Liquidity (0.35%) was the best-performing bucket in March, supported by resilient execution in both equity and rates markets. These strategies benefitted from reduced transaction costs and a rotation into liquid assets.

Factor (0.10%) strategies were slightly positive, with strength in equity value and low volatility offsetting losses in growth and quality exposures.

Value (-0.22%) delivered flat to modestly negative returns overall. While equity value outperformed, credit and FX value strategies underperformed due to sector-specific stress.

Hedging (-0.22%) and Carry (-0.36%) both posted slight losses. Carry strategies suffered from wider spreads in credit and rates, while hedging strategies were challenged by the timing and magnitude of volatility spikes.

Momentum (-1.32%) was the weakest performing bucket. Losses were concentrated in FX and credit momentum strategies, as choppy trading and weak follow-through hurt trend signals across asset classes.

Performance by Asset Class

Rates (0.67%) outperformed all other asset classes, aided by strong performance in liquidity-based strategies and a rally in U.S. Treasuries that helped directional rate strategies.

FX (0.08%) was marginally positive, with FX value strategies benefitting from the weaker U.S. dollar. However, momentum-based strategies faced headwinds from inconsistent price action.

Equities (-0.19%) posted slightly negative average returns. While low volatility and liquidity strategies outperformed, these gains were not enough to offset the drag from growth and size-focused strategies.

Commodities (-0.36%) were modestly negative, reflecting choppy energy prices and a lack of persistent trends across broader commodity markets.

Credit (-2.33%) was the weakest asset class, impacted by credit spread widening and poor relative performance of corporate bonds versus government securities.

Detailed Insights

The risk-off rotation in March had clear implications for QIS. Defensive and liquidity-sensitive strategies outperformed, especially in equities and rates. Low volatility and value factors captured sector rotation into safer exposures, while momentum and carry strategies suffered across FX and credit due to market reversals and widening spreads.

The weaker U.S. dollar supported valuation-driven FX strategies, but choppier intra-month dynamics hurt shorter-horizon models. The rally in Treasuries supported rate-sensitive QIS, particularly liquidity and trend-following approaches, while the increase in volatility offered limited relief to hedging strategies.

Conclusion

March 2025 reinforced the need for flexibility within quantitative investment frameworks. With volatility rising and dispersion increasing across and within asset classes, adaptive and diversified strategies were best positioned to navigate evolving macroeconomic trends. As Q2 begins, continued uncertainty around global trade, monetary policy shifts, and credit stress remains top of mind for investors allocating to QIS.