What Caused the Style Premia Slump in 2018–2020? A Cautionary Tale

Style premia investing—often called alternative risk premia or ARP — was built on the promise of simple, repeatable strategies that had delivered returns across decades of market history. Instead of picking stocks or timing markets, these approaches aim to exploit patterns in asset prices that tend to persist over time. Some of the most common are value (buying cheap, selling expensive), momentum (buying winners, selling losers), carry (earning returns from yield or interest differences), and defensive (preferring safer, more stable assets).

By combining these styles across different asset classes — equities, bonds, currencies, and commodities — investors hope to build well-diversified portfolios with low correlation to traditional markets. Often run by systematic models, and usually using leverage to enhance returns, these strategies look attractive as we saw in our previous blog post on the topic.

Here we want to focus on the period between mid-2018 and late 2020 when style premia (funds) experienced a long and painful drawdown and investigate its main drivers and triggers. What began as a slow decline turned into a full-blown crash by the first quarter of 2020 that had further repercussions later on. This is the story of how that happened — and what it tells us about the real-world risks of model-driven investing.

Phase 1: The Long Decline Begins (Mid-2018 Through 2019)

The trouble started quietly in the summer of 2018. Financial markets were unsettled by the U.S. Federal Reserve’s interest rate hikes and growing tensions around global trade. But while headline indexes bounced up and down, style premia portfolios began to slide for reasons that had more to do with internal market structure than macro news.

The biggest culprit was the value style. Value investing involves buying assets that are cheap based on fundamentals, such as earnings or book value, and selling those that are expensive. In theory, this should generate returns as mispriced assets revert toward fair value. But beginning in 2018, cheap stocks got even cheaper, while expensive ones — especially in technology and growth sectors — kept rising. This drove the valuation gap between cheap and expensive stocks to historic extremes, even wider than what was seen during the tech bubble of the late 1990s.

Importantly, this wasn’t a case of spreads being “too narrow” or value trades being overcrowded. In fact, the valuation spread between value and growth was at its widest point in decades. Yet returns to value strategies were still deeply negative. Cheap stocks stayed out of favor, and this divergence caused persistent losses for any portfolio tilted toward value.

Other styles failed to pick up the slack. Momentum — buying recent winners and shorting losers— had modest success for a while. But in September 2019, that too came under stress. Markets abruptly reversed: beaten-down value stocks rallied sharply, and high-flying growth names dropped. This “momentum crash” caused major losses in portfolios that were long momentum. The reversal didn’t last long, but the damage to momentum strategies was already done.

Carry strategies, which involve profiting from yield differentials in currencies, bonds, or other instruments, also struggled. Low interest rates across developed markets meant the traditional return sources in carry trades were muted. Meanwhile, spikes in volatility and sharp asset price movements made these trades riskier and less reliable.

The defensive-quality style (owning companies with steady profits and low share-price swings) was one of the few bright spots at the start of the draw-down. Low-volatility names outperformed the broad market and helped cushion multi-style portfolios—though the gains were too small to offset heavy losses elsewhere.

By the end of 2019, many style premia portfolios had posted flat or negative returns for more than a year. The diversification across styles had failed to protect them. Investors were growing impatient, but the worst was still ahead.

Phase 2: The Covid Crash and Forced Deleveraging (February–March 2020)

Early 2020 brought a global shock. The spread of COVID-19 triggered a fast and brutal selloff in risk assets. As fear grew, investors fled to cash, volatility spiked, and liquidity dried up in markets across the world.

For style premia strategies, this environment was especially difficult. These strategies typically use leverage because the raw returns from value, momentum, carry, and defensive styles tend to be modest. In calm markets, this leverage enhances returns. But in volatile markets, it magnifies losses.

In February and March 2020, those losses piled up fast. Portfolios that had already been weakened by years of poor value performance now faced fast-moving markets where almost all styles suffered at once. Deleveraging began. As margin calls hit and risk controls were breached, funds were forced to sell large portions of their portfolios in short order. This selling pressure further moved prices against them, locking in losses that might otherwise have reversed over time.

While some of the stress extended to government bond and interest rate markets —especially in the U.S. Treasury market, which briefly seized up in March — these areas were not the main issue. The most damage for style premia came from the equity market and cross-asset strategies, where factor exposure was highest and where leverage and crowding were more concentrated.

By the end of March 2020, style premia investing had suffered its worst single-month drawdown since the financial crisis. Many portfolios were down more than 20 percent from their peaks, and the cumulative loss from mid-2018 had reached extreme levels. Redemptions followed as investors questioned whether these strategies still worked at all.

Source: Bloomberg

SG Multi Alternative Risk Premia Index 2016-2025

Source: Bloomberg

Phase 3: The Uneven Recovery (Mid-2020 through 2021)

After the sharp losses in March 2020, global markets staged a rapid recovery. Governments and central banks responded to the COVID-19 crisis with large stimulus packages and aggressive monetary easing. Equities rebounded, credit markets stabilized, and volatility gradually declined. For traditional portfolios, the rebound was strong and swift.

But for style premia strategies, the recovery was slower and uneven. Some factors, particularly value, finally began to perform better in the second half of 2020. As investors rotated into cheaper, more cyclical assets, the deep underperformance of value began to reverse. However, the gains came too late for many style premia portfolios that had already reduced risk after the crash.

Momentum strategies remained unstable. Having suffered during the abrupt factor rotation in 2019 and again during the market whiplash of early 2020, they failed to deliver consistent returns in the months that followed. Carry trades in currencies and bonds were still limited by near-zero interest rates and shifting macro dynamics. Defensive styles lagged in the recovery, as markets favored high-risk, high-growth assets.

Adding to the challenge, many style premia funds were still dealing with outflows. After two years of weak performance and a sharp crisis loss, investors remained cautious. These redemptions limited the ability of funds to rebuild exposure or take advantage of improving conditions. The result was a modest and partial rebound—far from a full recovery.

Conclusion and Lessons Learned

The period from 2018 to 2021 was a severe stress test for style premia investing. What began as a slow and grinding decline led by the value factor became a full-blown crisis during the COVID-19 market shock. And even as markets recovered, style premia portfolios struggled to bounce back. The drawdown was not caused by a single mistake or technical flaw. It was the result of multiple styles breaking down at the same time, crowded positions reversing, and leverage amplifying losses in a stressed environment.

The third phase—after the crash—showed how long the recovery can take, even when fundamentals begin to improve. De-risked portfolios, ongoing investor redemptions, and persistent uncertainty all made it harder for style premia strategies to regain their footing. This phase underscored that systemic strategies can be vulnerable not just during a crisis, but in the long shadow that follows.

From this experience, several lessons stand out. Diversification across styles helps, but it is no guarantee—especially when factors become correlated under stress. Dynamic exposure management to styles and strategies would constitute an improved approach. Wide valuation spreads are not enough to protect against short-term losses if market sentiment continues to favor expensive assets. Leverage must be used carefully, with robust risk controls that anticipate sudden liquidity shocks. Crowding is real, and even systematic trades can become unstable when too many funds are on the same side. Finally, investor behavior matters. Patience can be scarce in drawdowns, and fund flows can turn recovery into a longer, slower process than models suggest.

Style premia investing still holds promise as we saw previously. The long-run evidence for these strategies remains compelling. But history has shown that even the most rational strategies can run into trouble—especially when markets change faster than models can adapt, while the allocation framework remains fixated on the same style premia. The 2018 to 2020 period was a hard-earned lesson in humility, patience, and risk awareness.