Alpha Is Dead: Barclays Says With Stock Dispersion At All Time Lows, It Is "Not A Stock Pickers' Market"

Tyler Durden's picture

There is a simple reason why all hedge funds with "relative value" or "deep value" in their names will soon be looking to change their moniker: stock picking no longer works, with the only strategy that matters, as implied correlation is now at the second highest level in history, is picking the time to leverage beta exposure and riding the broader market up or down. Alpha is now dead. as Barclay's head of quantitative strategies Matt Rothman says, "Indeed, it was hard to be a stock picker in the market for the last two months as the last two months have seen historically low levels of dispersion in stock returns. As shown in Figure 2, the cross-sectional correlation across all stocks in the market was at its second highest level last month (measured back to July 1950) and recorded its third highest level this month; there have never been to two months back-to-back with anything approaching these levels. To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either therun-up or the bursting of the Internet Bubble, or after 9/11. The reason this matters to all stock pickers — fundamental or quantitative — is because with stock return dispersions at all-time lows, it is extraordinarily difficult to be picking stocks." In other words, the danger of yet another systemic meltdown (or up), now that everyone is on the same side of the trade (and whoever isn't, is getting steamrolled), is higher than ever in history, up to and including May 6. And he, who has the greatest access to (risk free) leverage wins. Therefore look for all the "investment bank" hedge funds with prop desks and discount window access to once again post record trading days for the current and all future quarters until even they blow themselves up eventually and the Fed can do nothing to prevent it.

Full market commentary from Matt Rothman:

For us, this month was not so different from last month. Our models continued to work, marking two straight months of solid out-performance, ending our long spirit-crushing dry spell of underperformance. The broad market averages maintained their downward trajectory as investors continue to worry about the engines for future growth with implications from currency markets and various fixed income markets all leaking into the equities market. And so once again, it turned out to be all about quality.

This was good news for our portfolios – and for most practioners of quantitative stock picking – since our quantitative models give us positive exposure to the styles of investing that the market has been rewarding recently. Our models are built to gain consistent exposure to cheap high-quality companies with positive sentiment. In general, we like companies that are attractive on an earnings yield or free-cash-flow basis with strong historical profitability, improving margins and repeatable earnings that are also are being acknowledged by the market as having room to run through strong price momentum and improving earnings forecasts. Now, of course, it is high unlikely for any one company to have all of these characteristics going in their favor at any one moment in time, so our model is a way of picking and choosing stocks that come the closest to having it all. Moreover, not all of the characteristics described above are all positively rewarded by the market at any specific time.

What is noteworthy is that in recent months all three basic investment styles have all been working well. Cheap companies are outperforming expensive companies. High Quality companies are outperforming Low Quality companies. And companies with positive Market Sentiment have been outperforming companies with poor Market Sentiment. This lead to the relatively strong performance by our Quantitative models. In our long-only portfolio, 62.4% of our stocks beat their Russell 1000 benchmark. In the long-short portfolio, 66.8% of the longs beat the Russell 1000 and 47.2% of the shorts trailed the Russell 1000, for a combined stock selection hit rate of 57.1%. Last month, stock selection was strong for our model because the styles we liked were rewarded.

Let’s be clear, though, that this is not the same thing as saying this was a “stock picker’s market”. Indeed, it was hard to be a stock picker in the market for the last two months as the last two months have seen historically low levels of dispersion in stock returns. As shown in Figure 2, the cross-sectional correlation across all stocks in the market was at its second highest level last month (measured back to July 1950) and recorded its third highest level this month; there have never been to two months back-to-back with anything approaching these levels.1 To belabor the obvious and put this in perspective, current levels of correlation are higher than in October 1987, anytime during the Fall of 2008, either the run-up or the bursting of the Internet Bubble, or after 9/11. This observation holds across sectors, with the correlation of stocks within Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology and Utilities sectors all being at or very near historical highs.

The reason this matters to all stock pickers — fundamental or quantitative — is because with stock return dispersions at all-time lows, it is extraordinarily difficult to be picking stocks. The decisions that matters are related to style selection not stock selection. We are fortunate because the styles favored by our Quantitative model (Quality, Value and Sentiment) are being favored by the market. Clearly, the current levels of cross-sectional correlation are unlikely to be sustained and we fully expect to see them revert to their more normal levels in relatively short-order (weeks to months). Just as cross-sectional stock correlations converge towards 1 as markets falter, they tend to dissipate as markets rally. But we believe it would be unwise to read the chart above as a reason to think that a market rebound is due in immediate future. For example, market cross-sectional correlations remained highly elevated throughout the Fall of 2008 and first three months of 2009 (at levels above 50%) and came all the way in as the markets rallied. But we certainly do not believe that what sent the market rallying on March 9th, 2009 was not the unsustainable level of cross-sectional stock correlations. Rather, we hold it was a combination of wise and coordinated monetary and fiscal policies by governments and central bankers across the globe. Hence, we believe this is an interesting contemporaneous indicator about the current state of the market but it is ill-suited as a leading indicator of where the market is headed.


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RicktheDick's picture

Correlation always kicks up in a downward trending market. There's no reason to own single stocks anymore. If you are going to get long, and God help you if you do, you are better off owning sector ETF's and at least mitigating some of the inherent credit risk. Throw mirco-economic analysis out the window, and form a marco strat. 

Reductio ad Absurdum's picture

From another recent article on the same topic:

According to data provided by Cleve Rueckert of Birinyi & Associates, 78 percent of the S&P 500 is currently moving with the market.

Back in April the correlation was more like 50 percent. And if you go back further to the good old days of the mid-90s, according to Rueckert, it was around 30 percent.

ATG's picture

Who says stock picking does not work?

APC and BP up +20% and +24% so far...

Oh regional Indian's picture

Of course Alpha is dead.

Everything is tightly correlated and tightly coupled. Commodities, currencies, geo-politics. Lack of diversity in manufacturing.

Every one is playing the tail and praying they have a good quarter.

Beta will disappear similarly. Then only the extremely tactical (algos) and the extremely strategic will make money.


Ripped Chunk's picture

+ 10,000

"People, not commercial organisations or chains of command, are what make great civilizations work, every civilization depends upon the quality of the individuals it produces. If you overorganize humans, over-legalize them, suppress their urge to greatness — they cannot work and their civilization collapses."

Awesome post. Thanks for the reference





WaterWings's picture

overorganize humans, over-legalize them, suppress their urge to greatness

Seems to be at an all-time high!

Oh regional Indian's picture

Really does eh, WW?

Thus the strong feeling that we are near a massive "Top". multi-contextually speaking.



thesapein's picture

Ants, not queens or chains of command, are what make great colonies work, every ant colony depends upon the quality of the individuals it produces. If you overorganize ants, over-legalize them, suppress their urge to greatness — they cannot work and their colony collapses.

Oh regional Indian's picture

Glad it struck a chord RC. It did likewise for me.



Ripped Chunk's picture

It would have been cool if they had the balls to make Dune a 7 hour movie so they could actually tell the whole story and work all of the nuances into it with some more narration.

But the Hollywood bean counters would have said: huh?

Best just to read the book over and over.


Joe Shmoe's picture

Wow, then wouldn't it be great for Barclay's if they were in, say, a non-alpha market, like index funds, or ETFs, as in iShares?  

docj's picture

Off-topic: some absolutely gag-worthy sycophantic "reporting" from al-Reuters:

The US is "on track" to double exports over the next 5-years?  Really?

Two questions:

1) Double exports of what?

2) To whom?

HelluvaEngineer's picture

...but it's right there on the teleprompter, and it don't lie

Cognitive Dissonance's picture

Actually the defense that will be used when this entire mess comes crashing down and the public show trials begin will be that people don't lie, teleprompters lie.

The previous defense of "I was just following orders" will morph into "I was just reading the teleprompter".

carbonmutant's picture

You mean they'll start blaming their tools?

Cognitive Dissonance's picture

So much meaning in your 7 words, particularly the last one. :>)

1. an implement, esp. one held in the hand, as a hammer, saw, or file, for performing or facilitating mechanical operations. 2. any instrument of manual operation. 3. the cutting or machining part of a lathe, planer, drill, or similar machine. 4. the machine itself; a machine tool. 5. anything used as a means of accomplishing a task or purpose: Education is a tool for success. 6. a person manipulated by another for the latter's own ends; cat's-paw. 7. the design or ornament impressed upon the cover of a book. 8. Underworld Slang . a. a pistol or gun. b. a pickpocket. 9. Slang: Vulgar . penis. –verb (used with object)
10. to work or shape with a tool. 11. to work decoratively with a hand tool. 12. to ornament (the cover of a book) with a bookbinder's tool. 13. to drive (a vehicle): He tooled the car along the treacherous path. 14. to equip with tools or machinery. –verb (used without object)
15. to work with a tool. 16. to drive or ride in a vehicle: tooling along the freeway.

17. tool up, to install machinery designed for performing a particular job: manufacturers tooling up for production.
carbonmutant's picture

English is such a colorful language...

Ripped Chunk's picture

Tool (proper name) the best American band  still actively playing

Cognitive Dissonance's picture

wife: CD, what did you learn on ZH today?

CD: I learned about an American band called "Tool". Ripped Chunk says they're the best.

wife: Who's Ripped Chunk?

CD: Just some crazy ZH blogger.

wife: Are you cheating on me again?

CD: Again? That's a loaded question dear. What's for supper?

Ripped Chunk's picture

There is no best. Things that attract like minded souls to meet and share ideas is good and even sacred for a while.  Music, literature and art are the mediums that often facilitate these events.



Cognitive Dissonance's picture


I was dissing myself, not you. I had never heard of "Tool" until today.

Ripped Chunk's picture

I realized that. I would not say they are unknown, especially for the past 7 or 8 years. But they do draw in people from many mind sets. 

They are a musician's band meaning they are admired by people who play. But the lyrics are also as challenging if not more so than the music. So they have become pretty influential.  Like anything else, as the fan base has grown you will get an influx of people who are not honestly drawn in by the music (because they can't really get there intellectually), but arrive because they "heard it was cool" from someone they might have found to be interesting for 15 or 20 seconds. Maynard kind of addresses this "type of fan" in "Hooker With a Penis" on   ænima

DoChenRollingBearing's picture

Somewhat O/T, but I have to thank you again CogDiss for your work in helping us ZH-ers beat the lies, painful as all this is.

It's getting really hard to take all this fakery everywhere.

I do not see how we get out of the box.  We're doomed!  So, I am just going to sit on my assets and do zip.

Invest?  Forget it.

Cognitive Dissonance's picture

When things look the blackest and I feel there is nothing I can do, I try to remember a few things.

There's always work to be done on myself. Always.

And I turn to the Serenity prayer given to me many years ago to help me understand the difference between feeling hopeless and being hopeless. Sometimes I'm so focused on the things I cannot change that I forget that there are things I can change.

God, grant us the Serenity to accept things we cannot change, Courage to change the things we can and the Wisdom to know the difference

Feel free to substitute anything or one you please for the word God. I do. Never let religion get in the way of wisdom and these are wise words regardless of who or what said them or who or what they refer to.

DoChenRollingBearing's picture

That was very good CD.  Thanks.  I can always work on making myself better.

Actually I feel better than 20 minutes ago.

Ripped Chunk's picture

Make a donation to AA instead. I'm sure things are getting busier.

Cognitive Dissonance's picture

Anyone notice the frantic ponzi pump has Dow over 10,000..........again? They weren't going to stop until that happened. It became obvious around lunch.

And Gold's been driving all day and is now over $1,200.

suteibu's picture

He has no problem just throwing random numbers around to support his wet dreams, does he?

hedgeless_horseman's picture

Problem?  It is his strength.  I wonder what % of Barry O'Potus' presidency will be spent on the air.  Must be a record.

Cognitive Dissonance's picture

It's right there in the fine print.

"As a result of these policies, and a global economic rebound, exports in the first four months of 2010 grew almost 17 percent from the same period last year," the White House said in its progress report on Obama's export push."

So they're comparing the worst 4 months of 2009 to today, to which I reply "And it's only up 17 percent?"

Astute Investor's picture


The White House is not familiar with the concept of "easy comps"....

carbonmutant's picture

At least his handlers have trained him to keep his finger pointed up instead of at the viewers...

Tom Servo's picture

1) Empty shipping containers

2) Places where they manufacture things, China, Malaysia, just looked at my shoes that were made in Vietnam

Kegfreak's picture

1.Bombs and Missles

2.Mexico drug gangs

Scooby Dooby Doo's picture

It is a stock pickers market you just have to pick what you like not what you know. Case in point, and a true confession.

I LIKE PIRATES. There I said it. So I bought DEO, parent company of Captain Morgan.

I made money. Money that I can spend to buy more Captain Morgan. Arrrgh.

buzzsaw99's picture

That also helps explain the volume being concentrated in just a few names. Why bother digging when equities move in lockstep? Identify the trend then throw down at the table with the most players.

Joe Shmoe's picture

I actually did a study on this once.  People report it like it's the same scenario, regardless of where in the equities spectrum you invest.  From my study (admittedly 5 years old now), availability of alpha was very minimal over long term in large cap (growth and value) domestic.  But in Small Cap, emerging markets, some international, alpha is much more available: meaning good managers earn their keep in less crowded sectors, not in mainstream sectors.  Of course, none of this might make any difference in a crash or structural down trend.  

Popo's picture

b.b.but... what about Chinese solars?

DavidC's picture

I was talking with someone earlier today who's been trading since the 1960s - he says that all markets (effectively) go the same way these days - in the 1990s for example when the Nikkei was falling, the US was rising. Very interesting man.

Looks a bit HFT-ish since the London close this afternoon - gradual lobster boiling, pip by pip up. Just noticed Tyler's favourite is also climbing though (AUDJPY) so it could just be that!

Meltup on the close?


traderjoe's picture

Was it Art Cashin? Do the ice cubes stand a chance?

firstdivision's picture

Well, since correlation has been through the roof, that is just setting us up for one big fall.  There will be no safe haven from any major fluctuations, and now the term "defensive stock" is rendered irrelevant.  We are on the precipice of a major event and whether it is good or bad, we will find out on the other side.


colonial's picture

Hey Tyler, what about a caveat?  I agree with the premise and have said so on this site for months.  I called it the commoditization of the market.  I have also argued that on a larger scale, other linchpins of the investment world as we knew it are gone forever.    

For instance, what's a brokerage house today?  They are mostly now universal banks, with a few exceptions, (Brown Brothers, Jeffries, etc.)  What is an exchange?  You have written extensively on trading issues. 

Since the fiduciary debate refuses to go away, what's the definition of an investment professional?  If captive license holders no longer work for the House but must now work on behalf of the investor/client, why work for a House? 

This industry is changing before our eyes and the idiots in Washington don't have a clue what's going on...which is really scary. 

Here's my caveat, I think many mega cap stocks are in essence ETF's and/or indexes as well.  Therefore, traders and investors can now be long or short an index and add "alpha" by including a GE, XOM, JNJ, WMT etc.  Maybe the claim should be that the OEX components are also indexes.  Adding mega caps, long or short, provides limited alpha. 

stickyfingers's picture

Maybe that's why Uncle Warren bought Burlington.

Coldcall's picture

Bollocks. It may have been difficult (picking stocks) recently because the markets are uncertain thanks to our incompetent western politicians neglecting their fiduciary duties.

But good stock/sector picking is as important as ever, and these little diatribes from the likes of Barclays are all about convincing private investors that they cannot go it alone, and must sign up for an investment account with the big boys.

They are pissed because privates arent playing the "game".

SheepDog-One's picture

Exactly Coldcall...whats all this making sense of who is in what stocks and which direction picked? No one is IN the stock markets, isnt that what the Zerohedge series about the massive draws out of funds etc asserts? 4% of daily market activity is retail investors as I picked out of some article yesterday? Bollocks, dead empty casino and everyone knows its crooked as hell.

<Theyre pissed because the privates arent playing the game> 

Thats right! Theyre playing with THEMSELVES so who cares what they pump and ones in it for them to rob so theyre pissed off and throwing tantrums. So let them wring their hands and fret over S&P 1040 level, who cares certainly not me.