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Momentum Chasing Quants Explain Their "Strategy" And Pray The Electrified Grid Keeps Sleeping
If you ever needed to see a formalized definition of what momos are and why they believe chasing momentum is actually a credible strategy instead of a self-perpetuating bubble that sucks many of their kind in, until the musical chairs game stops and then you have a mad dash for the fire exits, read the below press release by AQR, issued when Cliff Asness' fund decided to go pedal to the metal in momoism. And keep in mind Cliff is not alone - these are the same "strategies" that gun up the market every day at 9:45 am, noon and 3:30 pm, simply because "it has worked in the past." Then again, the question, just like in the RenTec case, is who is on the other side of the trade that recurs like clockwork each and every day and where just 60 minutes of trading accounts for over 70% of the entire intraday stock market movement over the past 6 months. Another key question to consider as more and more momos pile into the momentum trade is what happens when it fails and all the previously natural buyers become very unnatural sellers. Will be a sight to behold when the momentum flips. But for now, someone is very happy to keep feeding the momos, who, with Pavlovian regularity, keep coming back, until one day the Skinner box fails.
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P.T. Barnum lives!
AQR's marketing is kind of weird. They are claiming to be a fund specializing in momentum, but they aren't offering something that bets for or against momentum in an attempt to make absolute returns. They are really offering a "hot hand" fund, that chases equities that've been hot recently.
AQR's momo equity funds, Marty Whitman's new junk bond fund, and PowerShares new non-Agency RMBS ETFs all look like ways to indulge retail joe/jane's predilection for performance chasing. Buying late as a badholder after "smart money" drives up the price selling back and forth amongst themselves in a game of hot potato.
Cliff Asness rocks. He's dead-on right about health care in this country, and he knows how to protect wealth better than 99% of the people who post here. Long AQR diversified arbitrage, and will happily be long this new fund.
AQR opened its diversified arb fund in the beginning of the year, when there were big spread opportunities for arbitrage in convertibles, spacs, and blank check companies. The opportunities have shrunk, which is why the strategies have performed.
Just because AQR knows how to structure a trend chasing fund, doesn't mean that the fund will perform well in the near term. Whether it will or won't depends on the opportunities, right now, for momo players. If the momo players have used up the momo opportunities in the past 2 years, perhaps the strategy won't do well for a while. If you haven't evaluated the opportunities available for the strategy compared to the opportunities available in other strategies, you are diving blind and praying the water isn't shallow.
The academic literature on momentum suggests it's been an effective strategy for decades. If you're trying to put together a diversified portfolio, being able to allocate a little bit to a momentum strategy seems like a reasonable option for part of one's equity allocation.
The academic literature on momentum suggests it's been an effective strategy for decades.
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The academic literature said the same thing about investments in nationwide mortgage pools as a diversified investment, since they hadn't dropped for decades.
Last June, a Goldman guy did a presentation at Nomura's quant conference in Tokyo. The Goldman guy said that the investment value of quant momo factors had been dropping for the past decade, and that the trades were becoming crowded, so it was time to do "dynamic" trades that took into account popularity. To me, this is code for "you need quant strategies designed to scalp the dumb quants and momo players". If you think AQR's fund is designed to cannibalize the slow players, have at it. If not, you are meat for the eating.
http://www.rattraders.com/
But do they have stainless steel rats? Right, didn't think so...
The cutting edge of trading technology!
" at last, however, the more prudent began to see that this folly could not last for ever. rich people no longer bought the flowers to keep them in their gardens, but to sell them again at cent per cent profit. it was seen that somebody must lose fearfully in the end. as this conviction spread, prices fell, and never rose again." extraordinary popular delusions and the madness of crowds.
On buying the dips, one of the usual Power Lunch talking heads was on CNBC the other day, "Buying the dips will work until it doesn't."
Momo bulls... sneak peak... this is how it ends!
http://www.theinspirationroom.com/daily/musicvideos/2006/10/David_Wojnarowicz_buffalo.jpg
lol
semper augustus
lol. love the picture of the rat. he looks a little like alan greenspan.
Must watch:
http://www.youtube.com/watch?v=ooSRh7V68uk
http://www.youtube.com/watch?v=XJyCG_OHXGg
http://www.youtube.com/watch?v=OfIlUMS_Q3g
Hey. I've noticed you are quite interested in understanding sympathetic resonance and how it could be used on poplulous. So I wanted to share some things for you to try and understand it better.
http://www.innerpeacemusic.com/
http://www.centerpointe.com/
This is the legitimate uses of it. But you'll find out more as you dig into it.
thanks. watching first one now.
if you think GS, JPM, AQR, RENTEC, or whomever guns the market every day at 3pm, why don't you get long every day at 2:55pm? free money...
"Open sesame!" ~Ali Baba.
It's sure working for me....till it doesn't.
I'm trading a $15 that moves in .50-.75 swings almost twice daily. I throw 500 shares at it and trigger every
.45 swing. So I make about $900 on about $7,500 and i have a stop at $1.05 or $550. What's not to love? It moved all week like crazy as the poor funds tried to invest the 401k contributions and such while there are no investors left in the market, no whales, no sharks, no cudas, only piranhas. Things are going to get very lean, very shortly and this is the last chance to squirrel away the nuts before the grasshopper gets left out in the cold. It's doubtful the money I have will prove useful in survival but maybe I can wait until the very end and hide it in the stock of certain survivors as a trade-able commodity in it's own right, no matter how bad things get.
No worries, Cliff took JDS Uniphase 101 in grad school
By Jeff Cooper
August 10, 2009
Cooper's Market Report
Mania (from the Greek “to rage, to be furious) is a condition characterized by extremely elevated mood alternating with episodes of major depression. Mania in an individual magnifies hope and desperation. Mania in a crowd is reinforced. The mind of a crowd can merge to form a way of thinking. Individual enthusiasm in a crowd is increased as a result.
The mass mind of the market is subject to contagion and control. Fear breeds fear; greed breeds greed; momentum begets momentum. An object once in motion will tend to stay in motion. The question that cannot be ignored is whether purposeful propaganda or a real change in the facts has set the object of mass psychology in motion.
The more market participants around us who are buying in response to the way the news is shaped, the more believable the story becomes, the more realistic a rally phase appears (and vice versa). It becomes difficult to distance ourselves from the beliefs of the crowd. The more prominence a story receives by the media, the more attracted market participants are to what may be a mass psychological trap. We tend to attract ourselves to things and people that may be the wrong decision in order to dispel a sense of uncertainty: any attachment, right or wrong, feels better than uncertainty and the unknown.
Volume hasn’t contracted like this since the summer of 1989. The fall of that year marked a swift selloff. When stocks explode higher on dwindling volume and suspect fundamentals, the risk of a collapse rises.
I am thinking this is just not quite the right time to enter a mo-mo mutual fund... the upside seems quite limited to where we were at 666... but is does seem to be a real strategy for investing if/when we retrace.
When I watch the market I am fascinated as to what its IQ it would have to be to act like this... where it gets so excited on the slimmest of reasons and can maintain that excitement until it SLOWLY processes the situation then becomes sad and deflated... I am thinking its IQ would be about 75.
To understand the market understand water.
S&P 666 was a big bellyflop, big splash = relief rally.
But waves do come crashing.
Got symmetry?
Jeff Cooper@Minyanville:
The S&P has rallied up to 1016.
This is the low of the high close day, August 27th.
1016 is 90 degrees from the date of August 27th.
So, 1016 vibrates off the high close day.
Of course 1016 being 90 degrees from August 27th on the Wheel of Time & Price may not mean anything, but it is worth noting that the price of 666 was 90 degrees from the March low. This is the dynamic that set up the March low in time and price.
Sometime in last March, Mr.Obama said it is good time to buy stock. This started the mania.
And when it snaps, which it will, the market won't know what's hit it - at least the 19 year old momo traders won't.
Tyler, one point of information - it's "pedal to the metal", referring to flooring an accelerator pedal in a car, i.e. pressing hard on the acceleration of the vehicle.
DavidC
I think he used it in the right context... to quickly accelerate... i.e. in momoism.
Yeah, I watched him on WeathTrack (http://wealthtrack.com/) last week except without the exceptional analysistrack missing...hope this week with Taleb will be more interesting, nope, nothing there, you've totally spoiled us Tyler.
Say I was a hedge fund, and I was making momentum trades daily at 9:45 am, noon and 3:30 pm in targeted momentum stocks.
What would my defined exit strategy be? What plans to these guys have to get out? They can't expect that the individual stocks they have grabbed will continue to be momentum leaders, so when to they move on to greener pastures?
You could take out the humans from the stock market and Monday the stocks would keep on trading on their own.
As long as there are funds, the stock market will remain alive, even without one single trader.
We have digitized what was too complex to be manipulated in order to control it.
It's a bit as if we managed to replace our weather with a digital weather system instead, for the sake of being able to control it rather than end up with an unpredictable system.
This is what is happening with the stock market. It is being digitized to bring it under control. To do this, one needs to eliminate competition and increase massively the amount of funds the remaining player will be able to trade with. As such, you seize control of the flow of the markets.
Then it's just a question of getting these remaining entities (market movers) to work together in a unified system and you can regulate the markets on a day to day basis.
It's much easier doing this with a few AIs/computers at a handful of major market movers than to get thousands of humans to work together to achieve the same result. It's also much easier to shift the blame if anything goes wrong.
5000 shares SPY
http://www.youtube.com/watch?v=Ta5i8L0Gkt8&eurl
Hi MinnesotaNice,
Yes, the context was correct, it was just the phrase itself that was incorrect.
DavidC
thanks a lot rollerball. i had several errands to run today but now i have six more hours of viewing ahead of me.
thanks a lot rollerball. i had several errands to run today but now i have six more hours of viewing ahead of me.
stupid momos
Been offering this as of 6/30/90 per the date in the corner...
Wow. TARFU.
Bears be patience.
Whatever comes out of these gates, we've got a better chance of survival if we work together. Do you understand? If we stay together we survive...
After reading Asness' social policy analyses, this is scary--he was in a Doctoral program?! Wonder if he finished . . . talk about falling educational standards!
Actually Cliff likes to sign this way:
Cliff Asness, Ph.D.
Did I notice that the principal is spawn of Goldman? lol
Don't we see the introduction of many funds at the tops of markets vs the bottoms? This seems to be just another case of same; likely a contrarian indicator. At some point the smart money will have distributed the stock they need to to folks like this, then they exit leaving the dumb money to be bagholders again.
Lionhead, you got it. Bingo. I have to laugh at Asness acting as if he discovered momentum investing and that it takes "research" to uncover it.
Jesse Livermore would be hooting.
he says in the piece that the indices are rebalance quarterly....so much for the daily moves.
with that said, so what if other funds are trading short term signals? that's what makes a market.
How is this any different than "portfolio insurance" 25 years ago?
Here's a photo of AQR's new trading floor....
LOL...
I think it makes a whole lot more sense to base the stair-step bull "market" action on outright official sector intervention than on anything else. but wtfdik?
Is this a hoax? Assness?
Cliff Asness and David Kabiller, Principals, AQR Capital ManagementLink: http://online.barrons.com/article/SB125149757049368027.html?mod=rss_barr...
This will work until it doesn't. And when it doesn't it will be very ugly. And someone will make a fortune.
Yup, when the momo specs run the prices high enough that dumn money won't play, all the specs playing hot potato will get burned holding over-valued stocks, junk bonds, etc. But the 64 million dollar question is how to predict when it blows up?
Actually you are wrong about the Skinner Box.
The Skinner Box was a transparent box that BF Skinner raised his child in. The idea was that the child could be in there naked and not need to be diapered with all of the detritous being rolled away under the child.
Perhaps the momo traders were raised in a Skinner Box.
http://newfoundlandnews.blogspot.com/2006/09/inside-skinners-box.html
This is one case where Wiki is just wrong. So-called Skinner boxes were a modification of the Thorndyke puzzle boxes, hardly an innovation. The true Skinner box was an innovation.
It seems that the new definition of Skinner box is revisionist history meant to avoid the really ugly Skinner in trying to rehabilitate his wacked out ideas.