Q1 Slams Hedgies ‘Most Popular Trade’ – Momo Crashes Most Since 2009
By Tyler Durden
“Being short those names was a really good trade during the second half of 2015. This is the flip side of that,” said Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors. “All these names which had been doing really bad have turned around and started performing. I would say a lot of it is people getting short squeezed.”
Indeed it did…
An investment approach that profits from the divergent paths of high- and low- momentum stocks over time, a strategy that had one of its biggest gains on record in 2015, seized up in the last three months, posting the worst quarter in six years. The plunge helped zap returns among a big category of quantitative hedge funds, the so-called market neutral group, whose year-to-date decline of 2.3 percent is the largest since 2012.
While the tactic may be esoteric, the force that pummeled it is not: a growing revulsion among investors to shares whose main claim to fame in the past few years was that they kept going up. Anyone pursuing the strategy got into particular trouble shorting companies with the lowest price momentum, a section of the market that ended up being the quarter’s biggest winner.
“Momentum was the dominant factor really significantly last year, more so than I can recall any time in my career. When market neutral performs like that, when it breaks, it breaks hard,” said Benjamin Dunn, president of Alpha Theory Advisors, which works with hedge funds overseeing about $6 billion. “All the returns to momentum that were generated, you saw that reverse this year.”
And here is the reason why – mid-February (as Carney and Draghi bid stocks off the lows), it was weak momo stocks that massively outperformed strong momentum stocks…
Entirely breaking the models…
As Bloomeberg concludes,
One cause of the momentum breakdown was “mean reversion,” according to JPMorgan strategist Marko Kolanovic, who predicted in January investors would rotate into value assets, seeking out shares priced at deep discounts to things like earnings and assets. Using long-short proxies, value beat momentum by 40 percent this year, buoyed by systematic strategies covering short positions, Kolanovic said in a March 17 note to clients.
That turnaround may have roiled returns for hedge funds. While they were snapping up the best-performing stocks, hedge funds also reduced value stock holdings in every quarter of last year, making it the least popular of the 10 styles tracked by Evercore ISI.
This did not end well the last time, as detailed at the time, during the week of August 6, 2007, a number of high-profile and highly successful quantitative long/short equity hedge funds experienced unprecedented losses.
The losses at the time were initiated by the rapid unwinding of one or more sizable quantitative equity market-neutral portfolios.
Given the speed and price impact with which this occurred, it was likely the …read more
Source: Q1 Slams Hedgies ‘Most Popular Trade’ – Momo Crashes Most Since 2009
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