This page has been archived and commenting is disabled.
Is A Quant Unwind In Process As The Short Squeeze Hits A Crescendo?
Continuing on our earlier post about the WSJ discussing Long-Short funds, we would like to highlight some very relevant observations by Barclays' U.S. Equity Quantitiative Strategy head Matt Rothman. In his most recent note, Rothman likens the underperformance in tracked quant factors seen on September 15th of this year, to that from August 9th, 2007. Those in the quant community vividly recall what happened then. Has the persistent push higher in market on no sustainable fundamental, technical or otherwise drivers at this point caused irreperable damage to traditional quant players, who have had no means of dealing with what, as Rothman points out, is merely a systematic anihilation of shorts. We would like to add that the major problem with short eradication is that when the market does inevitably turn, the number of investors who would have othersie been natural bids on the way down, and thus an informal decelleration pedal to any sharp downward move, are now gone. Whether this major change in the market's "ecosystem" will merely exacerbate an upcoming drop in equities will be closely monitored.
From Rothman:
We are not believers in superstitions, the occult, conspiracy theories, sun-spots, or horoscopes. But the date September 15th certainly seems not to be a particuliarly good one. Next year, we are planning to be far away from the markets, hopefully on an island, without access to a Bloomberg terminal or the Internet.
We all remember the events of September 15, 2008; September 15, 2009 had nowhere near the same headline drama but ironically the performance of quantitative factors was considerably worse. This past Tuesday, we experienced large negative returns in all of our three major quantitative themes – Valuation, Quality and Market Sentiment.
Specifically, on Tuesday, our long/short Valuation index returned -1.45%; our long/short Quality Index returned -1.47%; and our long/short Market Sentiment Index returned -1.75%. These returns are statistically significant and represent 3.3, 2.9 and 2.1 standard deviation moves, respectively, in the factors. We have not seen such poor performance in all of our factors on a single day since August 9th, 2007. Indeed, we have seen this level of misperformance on only 29 other occasions since July 1950 (approximately 15,000 trading days). To be clear, it is not the magnitude of the returns that is so unusual. Rather, it is the significant perverse performance by all of our factors at the same time that is eye-opening.
Yesterday, we saw performance in our Valuation Index and Quality Index reverse, albeit somewhat tepidly, with +0.55% and +0.71% returns respectively. On the other hand, Market Sentiment continued its trend downwards, returning -2.35%. The “up day” in Quality is notable as it breaks a string of 9 consecutive down days for the index; this ties it for the 6th longest losing streak for our Quality Index on record. On the other hand, Sentiment’s losing streak is now extended to 9 consecutive days, tying it for the 13th longest streak on record.
And as for Rothman's speculation on the causes of this peculiar move in factors:
It is hard to know what was the cause of Tuesday’s misperformance. The obvious candidate is that there was an unwinding going on by a major quantitative asset manager or multiple managers. Based on our conversations with the Barclays Capital trading desks and with numerous clients, we have no evidence to support this hypothesis. We cannot say definitively that someone somewhere wasn’t unwinding – we just have no evidence of it.
And when looking at reasons for the amazing market move since September 1, could it be explained as simply as yet another round of massive forced short covering, exacerbated by investors funnelling into the most shorted stock? The answer, apparently is yes.
Similarly, we find evidence that a short-squeeze has been occurring in recent days as investors also are flowing into names with higher short interest. As shown [below] since September 3rd, stocks with the highest short-interest outstanding have been consistently outperforming those stocks with the lowest short-interest outstanding. The uniformity in these returns across every quintile of short-interest is quite striking – short interest outstanding has been an almost perfect negative indicator of performance during this period. Additionally, over this same period stocks with the highest borrowing costs have been outperforming those stocks with the lowest borrowing costs. Again, the near uniform monotonicity of these returns across the quintiles is highly notable.
Keep a close eye out on news out of quantland, which so far has been phenomenally tightlipped about what likely are major development currently occuring throughout the industry.
»
- 7813 reads
- Printer-friendly version
- Send to friend
- advertisements -
but Bianco said the spx would go to 1200
Its happened AGAIN. literally like clockwork. POMO operation followed immediately by market magic bid.
http://www.ny.frb.org/markets/pomo/display/index.cfm
Shouldn't all of these metrics be ignored in light of the massive Gov. intervention????
That was a stupid question.
http://www.ny.frb.org/markets/pomo/display/index.cfm
it happened again. like clockwork. bids appeared in the exact time frame the Fed POMO'd all over the place.
When does that finally end?
Some of these look like buybacks from recent treasury auctions, like 5 year minus 3 month maturities.
Either way, it amounts to the same thing.
I keep waiting for someone to do a graph of the treasury maturiities by date and the maturities the fed holds over time. Tyler?
It is the drive to zero maturity that represents monetary inflation.
I d love to see a time scale graph of the POMOing done vs the SPX rise since March.
Any marketing value in unintentionally uncorrelating to that which is intentionally uncorrelated? Wait...
Oh noes! The skies are falling! This is nothing like August, 2007 you pantywaists. Run home to momma and don't come back until you think you're ready to run with the big dogs.
Just sounds like more burnt fingers to me.