Mo' Momo, Mo' Worries - Quants Fear Hedge Funds' "Outsized Exposure" To Market Momentum

Tyler Durden's picture

Better lucky that smart? Managers of active funds are now extremely concentrated in the strongest parts of the US equity market with 'momentum' massively outperforming the market in August (and ramping higher off the North Korea missile launch lows).

Bloomberg's Dani Burger notes that with more than half of their bets on high flyers like technology and online retailers, hedge funds have near-record exposure to momentum trades, a strategy that’s up 2.6 percent in August even as the S&P 500 heads for its worst month since the election. The resiliency of the bet was on display Tuesday, when Alphabet and Amazon opened nearly 1% lower before rebounding along with Apple to deliver the S&P 500’s biggest intraday reversal in 10 months.

“It’s like these things are like gold -- it’s almost like a safe haven,” said Mark Connors, the global head of risk advisory at Credit Suisse Group AG.

 

“This resilient price action in equities is commensurate with the constructive positioning we see across hedge fund strategies and speaks to the persistent positive sentiment in 2017.”

The much-followed FANG Stocks soared over 2.1% off the opening lows...

 

The 50 most popular hedge fund longs...

Bloomberg's Burger asks, how long can it last?

That's a question that’s becoming more urgent for hedge funds that have finally caught up to a market where gains are delivered by an ever-narrowing cohort of stocks. Volatility has been rising amid renewed geopolitical tensions, signs of uneven economic growth in the U.S. and the threat of further interest-rate hikes by the Federal Reserve.

 

What’s more, the very nature of following momentum poses its own pitfalls. The strategy is one of the more volatile factors, and when rotations occur, pain seeps through as leaders quickly move to the back of the pack.

 

All that points to a hedge fund love affair that’s headed for heartbreak, according to Joseph Mezrich, head of U.S. quantitative analysis at Nomura Instinet LLC.

 

“We are concerned about this outsized exposure,” Mezrich, wrote in a note to clients. “The last time momentum exposure was this high was in 2013-2014, which led to a sharp decline in fund performance when momentum collapsed. Fund managers may be setting themselves up for a repeat.”

So what happens next? We leave to CS' Mark Connors...

"You can’t manage your book for a big deleveraging... Momentum is an escalator up and an elevator shaft on the way down. But managing that is what active managers do for a living.”

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Deplorable's picture

Outsized crash coming....

TradingTroll's picture

The challenge will be covering shorts when the market is closed.

Then when it reopens we gap higher, crucifying shorts.

They would be ecstatic if they could destroy all shorts forevermore.

It's one of those consensus things, like global warming.

MillionDollarButter's picture

The moment you give up on the bear market, is precisely the moment it arrives.

DWD-MOVIE's picture

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order66's picture

Once again the answer is the same - wake us up when the 10 year yield holds above 3%.

Literally nothing brings stocks down for any meaningful period of time until that happens.

3LockBox's picture

"It's like these things are like gold..."

Unfortunately in the near future these people will wake up shocked, bewildered and dumbfounded and then and only then realize the only thing like gold IS GOLD.

coast1's picture

we are such in a matrix who knows anything anymore....off topic, but I listened to that guy Ben Carson?  I think he ran for president?  Anyway, I thought he was an ok person.  But he is probably a liar too huh?

indygo55's picture

He was running for president. Was his mouth moving? 

stocktivity's picture

Not even the flood of the century can stop the market. They are saying $75 Billion won't be enough but what the heck.

ds's picture

Economies and Markets on different orbits. CBs need the markets narratives to cover their ars'es, from their model failures. They are now the referee and the player. You only need to know that it is a dance between liquidity spaces with algos. Markets have to be propped to control more deleveraging that will hurt the banksters.

Trade the low lying fruits in the illiquid EM space. Their CBs are more blatant with their market activities and you ride with them. Their currencies are vanities. Strong currencies with no ZIRP for many of these debt laden economies are once in a generation opportunity. 

 

Dragon HAwk's picture

Willee Cyotee never ran out of Momentum

YUNOSELL's picture

I'm starting to believe now even a massive stock market crash will be bullish