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WSJ Points To "Long-Short" Quants' Deplorable Performance As Sign Of Market Correction Warning
A topic long covered on Zero Hedge is finally starting to grab some MSM headlines: core long-short quants have missed the entire rally. The WSJ highlights Rentec's REIF, a rather generic 175/75 L/S fund, as a harbinger of a potential major market correction to come. Indeed, if one were to look at RIEF's AUM over the past three years, one would wonder how it is that the fund, originally slated to have up to $100 billion in investable capital can still even be around:
L/S unwinds, redemptions and deleveraging have been by far the primary factor for forced moves higher in high beta stocks. Alas, you won't hear the mainstream media discussing this, as it really has no relevance to the green shoot rally.
As for Medallion, RIEF's always outperforming bigger brother, performance numbers are sketchy YTD, however one can be sure that the Ph.D.'s and Nobel recipients in East Setauket can not be too happy about the Flash ban. It will be interesting to see just how much better than RIEF Medallion does this year, and whether, with flagrant "Information asymmetries" out of the picture, Medallion's fate may be sealed.
Regardless, what is the only bright side in the otherwise dreary quant landscape? One would answer "Market Neutral", joystick yielding, liquidity providers, yet even they, according to the HSKAX and HFRXEMN, have not been doing all that hot (next story hint, WSJ). So who really is making money on liquidity provisioning? Perhaps an answer may be provided by the NYSE's SLP program and its benevolent monopolist: Goldman Sachs.
From the WSJ:
The bear market is over? Tell the quants.
The stock surge since March has done little to bolster the fortunes
of a group of "quantitative" hedge funds, which make investments based
on mathematical formulas.
One way these investors like to make money is by betting on
high-quality stocks while at the same time wagering against the
fortunes of stocks that seem overpriced. For much of the year, that
strategy hasn't worked out, because momentum stocks like American International Group and MGM Mirage, some without great earnings prospects or with poor balance sheets, have led the charge higher.
Overall performance figures for quant traders, while disappointing,
haven't been horrible. Quantitative "directional" funds rose 9.6%
through August, well off the 14% gain of the average hedge fund.
But some of the big funds are doing much worse. The MAN AHL
Diversified fund was down more than 14% through August, according to
investors, while Renaissance Technologies' RIEF fund dropped nearly
12%. Two funds run by Winton Capital Management were down about 8%.
There are indications that the losses have gotten worse in recent
days for some quants. Shares with the highest levels of short interest
have been among the best performers in the past few weeks, according to
Barclays Capital, while those with improving growth prospects are
actually doing worse than the market. "Quality" stocks are on one of
their worst streaks since 1950, Barclays said, causing problems for
many quants.
Rather than a sign that their whiz-bang computers should be chucked,
quants' problems could be an early warning that the stock gusher is due
a break.
Perhaps the WSJ would be comparably surprised if it found out that of RIEF's $5.3 billion in total assets, about a quarter are employee capital. One wonders if in order to be admitted in the presumably better equipped to handle "informational asymmetries" Medallion fund, Rentec's employees have to suffer through a forced RIEF purgatory. Although as the SEC investigation at Rentec hopefully draws to a close, they won't be forced to suffer such an indignity for much longer.
h/t Joel
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So, why are computers doing long/short strategies good, and the ones doing HFT bad?
I may be wrong, but my understanding is it's not the computers doing these "long-short strategies." Long-short is based on silly, outdated ideas like "fundamental analysis."
No, you're right. That's why we're (finally) getting so much interest in Behavioral Analysis. Behavioral Analysis of Markets (BAM) has been one of the few get get it right over the last few years.
Just in case you forget TD,MSM now adays don't have specialists(like you and people who frequent this sight) to write about complcated issues. It is much easier to write about growth in the porn industry which is much more important in the current enviroment,
once GS and JPM take over the main stream media, they will have plenty of analsyts to advise the american public.
... enter the return of the dark ages...
so is it quants or spreads that are more dangerous? my commodities Fund of Funds mostly invests with spread traders, and has significantly underperformed the market. Yet, we don't have many quant traders. The problem is that spreading the market on a fundamental or relative value basis has not worked. this is independent of the quant/non-quant issue. I wonder if one, or both, of these issues are driving the poor performance in equities.
LS strategies don't create separate tiers of market participants.
All one has to do is look at AIG. Look at it right now. Up 10%? WHAT THE F***???
An Aside: I have a friend who is an insurance broker for an AIG competitor. She is saying she's losing every piece of large business to AIG by ridiculous margins. (It's being run like an S&L in 1984, one big option) It's not going to end pretty.....
classic. government support of a weak player creating an unlevel playing field that drags down the strong. These assclowns orchestrating the "rescue" are contemptible scum; their corrupt and stupid measures are going to bring our nation to its knees.
+100
Is it just the end of these "L/S unwinds, redemptions & deleveraging" that you feel portend a major correction as they have been the driver of this beta rally?
Let the machines play hot potato with the worthless detritus of the pre-bust economy. I, for one, am quite thankful that the speculative mania is focused on trash- that leaves some real bargains for those of use more interested in quality and the long-term.
What is the ticker for the Quant on wuamnt arbitrage? other than GS of course
Any amateur investor knows that you should never short a stock that has too many short interest piled up. Why these high tech sophisticated quant algos chose to short precisely these perfect short squeeze candidates?
amateurs should appreciate that the pros are not amateurs, and that there is something diabolical at work here
Long/short hedge funds add value to the markets' functionality. Momentum followers and manipulators increase volatility and, when dominant, make the markets absurd. And that leads to an absurd economy. Which leads to collapse.
this market is totally disfunctional, which means disaster dead ahead.
the forces at work that have driven markets to this stupid, destructive state are the forces that regulators need to address. Too bad for us that the authorities (the regulators) are the primary cause of this disfunctionality. Team T3 and Government Sachs belong in hell.
An interviewee on CNBC the other day pointed out that they had found that junk stocks had led the rallies in the market for the last several/many recessions and this is normal...and that the junk led rally typically continued for some time. The logic, I guess if there is any, is that these would be the lowest valued stocks, lesser traded names, and easier to make big moves more timely.
So, play by the rules ladies and gentlemen...either that or assume the position to be Obamanized.
I wish somebody would use that hammer on HAL9000
Yet another indication that high-fee, actively managed funds get you no better than market performance on a good day, and on a bad day make horrible blunders with your money all while still collecting the loads and fees.
Pension funds are starting to get it. When will the rest of the world understand that you don't win long term with active management?
Actively managed funds perform fine for people who diversify their portfolio appropriately with them. Since January 1994, the Credit Suisse Tremont Long-Short index is +354.4% cumulatively (a tad over 10% annualized), with much less volatility than the S&P 500.
Ten percent annualized for the past 15 years is pretty damn good.