I suspected after seeing which type of stocks are exploding higher, and just how vicious the moves are, some hedge funds must be taking it to the chin - I wrote in [Apr 26: The Meek Continue to Dominate Equities]
The list was a whose who of beaten down merchandise. Generally, by week 4-5 of an oversold rally these type of names begin to peter out but the ramp has been relentless in lower quality, low price stocks. My gut tells me quant (and other varieties) of hedge funds have been shorting these names, using fundamental reasons - expecting some pullback after huge runs - only to be run over again and again even in week 6 and 7 of this rally.
But much like August 2007 (but in opposite direction back then) we are seeing some very strange moves of magnificent quantity in individual names that do not square up with any reasonable fundamental reason; it just appears to be hedge funds leaning hard and being snared... in August 2007 the moves were down, now the moves are up.
My suspicion is confirmed - increasingly as more and more money is in fewer hands, I've noticed you need to know not only about companies but who is in there with you investing in said companies. Unfortunately that only comes with a long delay on the long side via SEC filings and we have zero visibility on the short side. Some of these quants are turning over hundreds upon hundreds of trades a day so you just never know what is going on out there.... as we posted last year, while the hedgies control a relatively moderate amount of assets, they dominate the day to day trading and volume in these markets - estimates anywhere from 1/3rd to upward on a daily basis (although Goldman Sachs has now taken over huge portions of the daily volume the past month or two)
I cited August 2007 specifically above because I saw the exact same sort of 'markings' (I feel like some scout from the 1400s) in the market - the dislocations looked identical. Sure enough some versions of HAL9000 was getting blasted again.
- Quants are back to wearing boots at work. But they aren't dealing with another 100-year flood, just yet. A number of quantitative hedge funds have been crushed lately, even as the stock market soars, causing a stir on Wall Street. These funds, which rely on sophisticated computer models, generally have beaten the market over the past few years. But they have suffered sharp losses in short time spans, such as in August 2007. That is something their whiz-bang models said was almost impossible, raising questions about their approach.
Look, it's a bird! It's a plane! No really it's a bird! A Black Swan! A rare event that only happens ... well every 18 months. Time to outsource these unflappable models to foreign based PhDs - it appears ours are being defeated by Tim Geithner.
- Troubles in quant land sometimes are a canary in the market's coal mine; when their computers are off kilter, it can suggest trouble below the market's surface. (no trouble here, move along - all I see are green shoots; just ask Goldman Sachs - they've only lost 9 days in the entire first quarter i.e. batting .600 in baseball terms for 3 months) In August 2007, for example, the troubles reflected moves by some big investors to dump positions to slash their level of borrowed money, steps that foreshadowed similar moves by other investors in the subsequent months.
- Some are taking on water yet again. Jim Simons's RIEF fund fell more than 16% this year, through April 24, while two big funds operated by MAN AHL, the largest publicly traded fund, are each down about 10%, investors said. Some trend-following funds, which had positioned themselves for more market troubles, have lost as much as 10% in the past month or so.
- Things aren't as troubling this time around. A number of big quant funds are doing well, including those focused on statistical arbitrage, making it harder to generalize about a quant rout. Funds operated by AQR Capital Management are up more than 10%, while D.E. Shaw is making money. Mr. Simons's Medallion fund continues to print money, investors said.
- What has really happened is that quants, with a strategy of focusing on high-quality companies and betting against riskier shares, are getting clobbered. (talk about a lame strategy - buying high quality companies and betting against riskier shares? What loser [pointing to self] would apply this logic??) The market rally has been led by growth stocks, bombed-out financial shares and companies with poor balance sheets and lower profit margins. (because in 4 to 6 months all will be well in Oz again)
So this time it is only some of the HAL9000s rather than August 2007s just about all of the HAL9000s. Again, not to worry - commence buying stocks. HAL is.
On a related note - some humans remain cautious... although many are now feeling performance anxiety.
- Hedge funds are back in the black, but 2009 so far is proving to be a much better year for the bulls than the bears. After suffering steep losses last year, hedge funds as a group are up 4.2% through the end of April, according to the latest data from Hedge Fund Research Inc., a Chicago-based data tracker. Individually, though, managers who bet on further falls in stocks are suffering badly, while bullish managers have gained as much as 30% on the market rally in April alone.
- .... the stock rally could put pressure on bearish managers to change tack, moves that could boost stocks further as managers turn around and buy. In one sign that managers are feeling the pressure, David Einhorn, of the $5.1 billion Greenlight Capital fund in New York, has shifted to a more positive stance, helping the fund gain 4.4% in the first quarter of 2009 after posting losses of 22.7% last year.
- Wrong-footed longs become smaller problems in market declines, while wrong-footed shorts become bigger problems as the market bounces, Greenlight said in a May 1 investor letter. (preaching to the choir Einhorn!)
- Equity-focused funds, which account for the largest group of hedge-fund managers, have fared better than average, up 6.1% this year.
The rest of the story is filled with individual metrics but it is interesting - the hedge funds who acted least like hedge funds and more like long only, all in mutual funds and suffered badly in 08, of course benefited from this massive rally while some of those who did better in 2008 are suffering now. As I've been saying no system works all the time (unless it's Renaissance Technology Medallion) and with the bipolar mood swings in this market, it's so easy to get caught wrong footed. I run a strategy more of the hedge fund ilk, rather than the mutual fund world - so I actually feel pretty solid considering I am a 1 man operation with no institutional information access - more than keeping up with the median despite running a quite conservative system.
Some cautious operators of note to finish this piece
- Some managers have missed much of the recent rally by remaining cautious on the market. Christopher Hohn, who runs London-based Children's Investment Fund Management LLP, has dramatically reduced his exposure to the stock market and has moved the majority of his funds into cash or cash-like investments, according to people familiar with the returns. His fund, which had about $9.5 billion of assets at the beginning of the year, is down about 7% this year, people familiar with the matter said.
- John Horseman, founder of Horseman Capital Management Ltd. in London, which manages about $5 billion, generated big returns last year from his bearish stance, posting gains of 31% in his flagship fund. But he has fared less well this year, losing 12% through April.