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.