Where the value investing strategy still works

Where the value investing strategy still works

Losses have been brutal in US but strong gains have been made internationally since depths of Covid pandemic

DANIEL RASMUSSEN

24. May 2024

The writer is founder and chief investment officer of Verdad Advisers

Trailing performance has not exactly been a selling point for value investment strategies in recent memory.

As the last 15 years unfolded, a wave of bad performance has seen allocators shift remorselessly away from the strategy of investing primarily at undervalued companies to more growth-orientated approaches.

This has hollowed out the value investing community. As far as I can tell, the universe of value managers has shrunk to the aged whose records pre-2009 are strong enough to keep investors loyal, quants who trust the long-term data and cranks who are weirdly obsessed with natural resources stocks.

The recovery from the Covid pandemic now seems like a false dawn for the value community in the US, as artificial intelligence-mania swept the market in 2023 restoring the fortunes of the briefly embarrassed growth managers and punishing the briefly optimistic value managers.

The value "factor", which measures the returns of going long cheap stocks and short expensive stocks, suffered a 50 per cent retreat in the US from 2009 to the depths of Covid in 2020, as figures from the data library of Dartmouth professor Kenneth French show.

It then recovered sharply through the end of 2022 before falling off again, starting almost exactly when ChatGPT was released in November 2022. Since then the value factor is down 11 per cent in the US. This has not been a pretty ride for advocates of value investing.

But there's a myopia to focusing so much on the recent experience of the US value investor community. This is because the story looks strikingly different internationally.

Value suffered a similar swoon as in the US, suffering a 30 per cent drawdown through the depths of Covid. But since March 2020, its performance in non-US developed markets has been a steady, almost linear rise. International value has even had strong performance during the ChatGPT era. The outperformance since March 2020 has been so good that the value factor now shows outperformance over three-year, five-year,

10-year and 15-year periods. The value factor is up 36 per cent in developed ex-US markets.

So, while many assumed value was dead, it turned out it had just got on an aircraft and headed for Europe and Japan.

Any arguments for the death of value - and the abandonment of it in the US - have to grapple with this strong performance internationally. If value was a statistical anomaly never worth betting on, why has it paid to bet on it internationally?

If something structural has shifted in the market to make value not work, why has that only affected the US? If quantitative investing is too simplistic and just buying the cheapest stocks is a dumb strategy, why have the idiots who practice this approach outperformed in Europe and Japan?

I would argue that the best interpretation of this data is to see the underperformance of value in the

US as historically contingent, dependent on a specific set of events occurring. And that set of events has been major technological innovations first in cloud computing and most recently in AI.

These allow companies with the best technology to grow to global scale with near zero marginal costs, producing winners that can increase profits at a rate and a scale that seemed impossible in previous decades.

But history has shown that markets tend to adapt to technological shifts. Competitors learn the new technology and drive down prices. Businesses in other industries adopt the new technology and use it to improve their own operations.

We can imagine how this might work with AI: the initial spoils go to the first company to invent a workable Al system (say OpenAI), but over the next three to five years, competitors emerge that can produce the same technology. So the innovator's pricing and margins drop. And then, maybe, a group of boring old-world companies with big customer service departments all adopt AI technology and dramatically reduce headcount and improve margins.

While the initial equity returns would flow to the innovator, the longer-term benefits might accrue to the customers of that technology. Economic theory would hold that at least customers need to derive a return on investment over and above what they spend on the new technology.

Even if the sun seems to have fallen on US value investors, the dawn has emerged internationally and, theory and evidence would suggest, the sun will rise again, perhaps sooner than expected, in the US as well.

////

Friday, 10. October 2025

The under-appreciated crown jewel of Citadel's $66bn investing empire is its commodities business, which spans the gamut from traditional futures trading in corn or silver to actually transporting physical resources and energy.

Citadel's commodity business is said to have made about $8bn in 2022 and $4bn in 2024, and its success is said to come from at least

partly from its emergence as a major player in certain physical commodities market. Details on this merchant business are sparse, but the hedge fund itself brags that - roughly a decade after it first started - it is now "one of the largest physical natural gas businesses in North America"

This is why Alphaville found this Jane Street job ad so intriguing (HT Rupak Ghose):

"We're looking for a Natural Gas Scheduler to help build and scale our growing US physical gas business. As a relatively new business line at Jane Street, operating since 2023, we are leveraging our existing systems in a slightly different way than a typical physical gas shop and are looking for someone who is eager to think outside the box and is open to challenging industry consensus.

In this role, you'll work collaboratively with the team on commercial and operational workflows to support day-to-day trading and longer-term growth. We are committed to building this business at scale and investing for the long term."

Jane Street has since 2004 traded the financial commodity markets (FWIW it's currently also looking to hire nat-gas, power, LNG, grain and oilseed analysts in London and New York). But we had no clue that it started venturing into the physical markets in 2023

Last year's bond prospectus didn't mention it, but a closer read belatedly reveals that it actually held $16.6mn worth of physical commodities on its balance sheet at the end of that year (plus a $126mn liability for physical commodities that were sold but not yet purchased). That was up from a minuscule $8.1mn position at the end of 2022.

In other words, Jane Street is still tiny in this area, but the job ad implies that it now wants to bulk up considerably. This is

simultaneously both profoundly weird and entirely natural.

It's weird because proprietary trading firms are by their nature oriented around speed, nimbleness and algorithmic-driven efficiency.

Buying and selling physical commodities requires close relationships with suppliers and users, and can inevitably involve storing and transporting a lot of it as well, which is something even hedge funds mostly struggle with. There's a reason why even the big banks have largely withdrawn from this business.

Pretty much the only one we've heard that can go toe to toe with the likes of Glencore or Trafigura is Citadel - not coincidentally, the head of its commodities business is Seb Barrack, who used to lead Macquarie's monster resources trading business. But it has a much more focused approach, focusing mainly on commodities that can be more easily modelled by quants, like power.

Jane Street is not really a "traditional" high-frequency trader - speed is important but not an essential part of its business, and it routinely holds positions for hours, days and

and even weeks on occasion - but this is still a big leap for the firm. It also didn't mention physical commodities as a growth area in its 2024 bond docs.

However, this is at the same time a fairly natural move for the New York trading firm.

Jane Street has historically never done elaborate, ambitious five-year plans or the like. Executives have told Alphaville in the past they typically just look for natural new areas adjacent something they're already doing, and expand step by step. For example, ADRs led to equity ETFs; equity ETFs led to bond ETFs; and making markets in bond ETFs brought them into credit trading. As a result of this iterative approach, Jane Street is now a major player in a market that many thought would remain an exclusive preserve of big banks forever.

We therefore assume that the move into physical commodities - and specifically US gas, judging by the job ad - is therefore an early stage of an gradual expansion from its large-ish commodity derivatives business. If it works out it might quickly expand gradually into similar areas.

After all, while Jane Street might not do master plans, they don't invest time, money and other resources in areas they don't think can ultimately become big

They've also shown that they can build institutional relationships on the credit side.

Jane is not alone in reckoning this is a big growth area. Citadel is also looking for more US physical gas specialists and has got involved in the production side; Balyasny and Qube have both started trading physical gas in Europe; and Jain Global last month acquired Anahau Energy to fast-track its own business in the field. But DRW and now Jane Street are the only major prop trading firms that we've heard enter the business.

The final reason why this is an

understandable move is simply that Jane Street has made such ungodly amounts of money in recent years that they're probably running out of places to deploy it.

As Alphacution's Paul Rowady pointed out recently: "When prop firms become active in venture capital, it's a sign of surplus capital relative to core capacity." This is an oblique reference to Jane getting into the likes of Thinking Machines, Anthropic and Core Weave.

The latter two were probably big drivers of Jane Street's profits lately, but expanding its commodities presence seems like a better way to use some of its retained earnings.

Sent from my iPhone