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Brian Sack And The Robots Claim Another Market Neutral Victim As The Market Continues To Reward Only Failure

Tyler Durden's picture




 

While it may not be Duquesne or Shumway or even Icahn, it is merely the latest in a string of hedge fund closures, in this case market neutral, thus without a long or short bias, that was just put ouf of business by the ongoing streak of market surreality courtesy of $5+ billion in daily average POMOs, and the complete dominance of momentum driven, algo sponsored and robot implemented market strategies. The pioneer James Advantage Market Neutral Fund is now closing. "We have some important news to pass along on the James Advantage Market Neutral Fund (JAMNX). We have decided to close the Fund before June 30, 2011. While it was one of the first Market Neutral mutual funds to come out in 1998, times have changed and the investment approach has not been accomplishing what we originally intended." Chalk one for robot assisted central planning. And confirming that the "market" no longer rewards "quality" companies and merely encourages failure (thank you Uncle Fed) are the latest observations from Barclays's Matt Rothman: "Despite the retrenchment last week, in quant land the euphoria gripping
the market has manifested itself in a continuing struggle for High
Quality companies. Our long/short Quality index last month turned in
notable underperformance, returning -1.64%. As this index generally runs
at approximately 1/3rd the volatility of broader market indices such as
the SPX, this underperformance is eye-opening to us. We were hoping that earnings season and the ensuing news by just a
few companies might have been responsible for the strong
underperformance of Quality – that it was a few outlier stocks, a few
big names that drove our index down. Unfortunately, this is not the
case. Quality as style just failed...
This is the second worst monthly stock picking performance for Quality since we launched our model in July 2007... To see large stable companies, with solid profit margins, strong
balance sheets and repeatable earnings underperform in this manner month
after month now is distressing.
" Someone please inform the Chairsatan that he has flipped the core premise of the stock market 180 degrees upside down...

James M/N Fund swan song:

James MN Fund

And now the most recent commentary by one of our favorite quants, Barclays' Matt Rothman, who confirms that risk and reward are now irrevocably flipped.

Earnings season is winding down and we have seen 83% of companies within the Russell 1000 now reporting results. It has been an eventful earnings season with over 65% of reporting companies beating estimates by an average margin of 12.1%. The markets have, overall, liked what they have seen from most companies.

Despite the retrenchment last week, in quant land the euphoria gripping the market has manifested itself in a continuing struggle for High Quality companies. Our long/short Quality index last month turned in notable underperformance, returning -1.64%. As this index generally runs at approximately 1/3rd the volatility of broader market indices such as the SPX, this underperformance is eye-opening to us.

We were hoping that earnings season and the ensuing news by just a few companies might have been responsible for the strong underperformance of Quality – that it was a few outlier stocks, a few big names that drove our index down. Unfortunately, this is not the case. Quality as style just failed. 55% percent of our High Quality names underperformed the market and 60% percent of Low Quality names beat the market. This is the second worst monthly stock picking performance for Quality since we launched our model in July 2007.

To see large stable companies, with solid profit margins, strong balance sheets and repeatable earnings underperform in this manner month after month now is distressing. Of course, we understand that in periods of relatively easy money, High Quality will generally underperform. This is to be expected, in fact. But the length and the degree of the underperformance has become historically significant. As shown in Figure 3 below, the prior most recent time that valuation spread between High Quality and Low Quality companies was this large was in the summer of 1999 – in retrospect, this was not a time renowned for its rational pricing of risky assets.

While our credibility may be waning here as we continue to make this call and pound the table on this theme, we remain firm that large Quality stocks remain cheap and present an attractive investment opportunity. As the valuation discount for High Quality stocks  approaches historically significant levels coupled with a nearing potential withdrawal of liquidity by the Federal Reserve, we believe High Quality stocks should be poised to outperform in the relatively near future.

Good luck Matt: many a person before you has tried to take on the Fed. None has yet succeeded.

 

 

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Sun, 05/29/2011 - 13:12 | 1320704 yipcarl
yipcarl's picture

Mind boggling lies, manipulation, and outright scandel plague our political and financial system and anyone who doesn't see it chooses not too.  It's so obvious my fear is that most of my fellow Americans have absolutely NO CLUE what is happening.  We are a bananna Republic and our capital markets are rigged like the towers on 911

Mon, 05/30/2011 - 13:52 | 1322813 Paul Bogdanich
Paul Bogdanich's picture

While I agree that the symboitic relationship between the ploiticians and the bankers has turned the market into a rigged game and further agree with Messrs. Ichan & Mobius that a repeat of the prior problems is inevitable given the inability to neact any meaningful reforms.  That said some of these funds in Denver like James, Janus and many of the others are not the best run vehicles in the world.  You can find worse like Fidelity but the inability at James to see that the smart money is convinced another crash happens and as a result are playing short term trades in high liquidity issues therefore depressing the stocks of the stable slower growing companies is a failure on their part.  A dangerous failure at that.  These guys actually believe that the "system" is fixed and that the probability of another crash is negligible.  In my view this is a problem on their part and that belief is also why they can't understand the poor return on their strategy.  If a crash happens these "high quality" issues go lower with everyone else and before the crash they have less upside than other issues.  So in that situation and given that nobody knows what will percipitate the next crash nor when that will happen, why buy these "high quality," slow growth issues now unless they are under the trading range for a <30 day flip?  Doesn't make any sense.  IMHO 

Sun, 05/29/2011 - 13:18 | 1320713 duncecap rack
duncecap rack's picture

Capital context keeps saying the up in quality trend in bonds is pervasive. Might it not follow in stocks soon as well?

Sun, 05/29/2011 - 13:16 | 1320714 random shots
random shots's picture

http://performance.morningstar.com/fund/performance-return.action?t=JAMNX&region=USA&culture=en-US

Tyler,

JAMNX was an underperforming fund way before HFT and POMO. Reaching very far with this story...

Sun, 05/29/2011 - 14:25 | 1320800 jm
jm's picture

Yes, they sucked, but they really started sucking after QE began.  This speak volumes.

Sun, 05/29/2011 - 15:14 | 1320898 rocker
rocker's picture

Why couldn't they do as well as Goldman, JP Morgan and Back of America. Between the three. Over 90 days of trading  yielded one minus day at one firm. The rest had perfect days every day. 

Mon, 05/30/2011 - 20:29 | 1323591 jm
jm's picture

Different strategies and market neutrals don't have a flow desk.

Sun, 05/29/2011 - 16:07 | 1321002 max2205
max2205's picture

This is just another way to say that an overbought market is reversing to ...... On it's way to oversold down the road

Sun, 05/29/2011 - 13:35 | 1320726 cowdiddly
cowdiddly's picture

I used to be a fundamentals based Value Line type investor and sometimes a catfish. Guys like me have been run out of the market for 2 years now as nothing makes any sense. I don't buy what I don't understand. Its all yours robots and momo monkeys. Have fun eating each other. I will save my money until you guys are done destroying things and when it comes back to earth and news and fundamentals matter again I'll break out the monopoly wheelbarrow. Until then there are legions of us saving our ammo to play another day if and when our markets ever return from a central planned nightmare. As Uncle Ben pumps money in, all the corporate insiders sell al their free shares as fast as they are vested. In effect the gov't is transfering future tax revenues to maintain the lifestyles of the corporate officers and directors:Sad but true.BUY REITS LOL

Sun, 05/29/2011 - 14:31 | 1320822 jm
jm's picture

I like to think of it as "going to Vegas".  I buy cheap lottery tickets.  Buying stuff bid up by robots ain't doing it. 

HFT is based on the illusion that minimizing the time horizon reduced liquidity risk and such.  Nanoseconds or no, some robot is going to get left holding the bag on some of this stuff.

Sun, 05/29/2011 - 13:32 | 1320734 NotApplicable
NotApplicable's picture

We need a zombie Andrew Jackson to slay the zombie Fed... again.

Sun, 05/29/2011 - 13:48 | 1320757 slewie the pi-rat
slewie the pi-rat's picture

i think we'll need mo momo.

obviously, these losers weren't into PMs.  it's out to pasture if ya can't out-perform congress.

Sun, 05/29/2011 - 14:41 | 1320838 geotrader
geotrader's picture

Why didn't they just buy NFLX?

Sun, 05/29/2011 - 15:15 | 1320895 Beatscape
Beatscape's picture

Trading is hyper competitive and highly dynamic. It's no surprise that the old style Benjamin Graham value investing doesn't work anymore--especially as people are looking for alpha returns.  You aren't going to attract the big money folks with ZIRP as the new norm and the backdrop for safe coupon clipping.

Today's economic landscape has a winner-take-all-mentality--and everyone is chasing the winner in each category.  And, this drives the stock prices of those apparent winners into stratospheric valuations. Facebook has wiped away previous darlings Geocities, MySpace, Friendster, etc.  Apple, very late to the game, re-defined mobile cell phone devices and now has a product that contributes $12+ billion per quarter in revenue. Google rules the internet search market.  Netflix is now the leader in on demand video--a new market that killed Blockbuster.

Combine the search for tomorrow's iPhone with a Fed that refuses to acknowledge rampant inflation as it expands it's balance sheet beyond anything thought possible without igniting world-wide hyper inflation, and you have the ingredients for a market that is not going to adhere to the old rules of thumb.

If HFT systems can generate consistent 100% winning track records, then (like it or not) the world's money is going to seek out these new alpha algo-driven trading funds.

I suppose I'm just stating the obvious here...

 

Sun, 05/29/2011 - 15:31 | 1320933 Gordon Freeman
Gordon Freeman's picture

No, that's a pretty good summary...

Why anyone would "invest" in the stock market, given the current realities, defies logic.

Sun, 05/29/2011 - 16:54 | 1321102 Use of Weapons
Use of Weapons's picture

As a serious question, who coded the HFT?

I was in London when the change over to electronic trading occurred, so its been a couple of decades, but someone must write the code.

 

Find them, you've got your golden ticket.

Sun, 05/29/2011 - 15:23 | 1320910 monopoly
monopoly's picture

Yes, someone like Andrew Jackson, James Madison or Monroe. We need a leader whoe does not care about being re-elected. Does not need 80 millon dollars, yachts, 4 homes, and $50,0000 bracelets for his wife, and cares about....Americans.

 

Sorry guys, I am awake now. Forget the above.

Sun, 05/29/2011 - 15:42 | 1320954 Jack Sheet
Jack Sheet's picture

Right on, and just look at the HUI/XAU, which have had the bollocks shorted out of them by the hedgies. But .... they may have their day yet. I'm holding on.

Sun, 05/29/2011 - 16:12 | 1321012 gwar5
gwar5's picture

Manipulation investing styles can change with economic shifts but the manipulation and cheating these days is epic.  

Mon, 05/30/2011 - 22:46 | 1324231 joiceca
joiceca's picture

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Tue, 05/31/2011 - 05:15 | 1324676 FoieGras
FoieGras's picture

Just another manager who doesn't cut it anymore. Mutual funds have closed 20 and 30 years ago and guess what they're closing today. And tomorrow still some will close as new ones get lauched.

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