JPMorgan Head Quant Explains Why Most Hedge Funds Have Been Slammed In 2016

As we showed one week ago, it has been a deplorable year not only for the broader market, but for some of the marquee "hedge" fund names, who once again have shown they "hedge" only in name. We followed up with a report on the world's largest hedge fund, Bridgewater, whose Pure Alpha strategy we further showed has gotten slammed in the first two weeks of February, losing a whopping 10% in half a month.

Why the hedge fund rout? JPM's head quant, Marko Kolanovic, who recently called the violent rotation out of momentum stocks just before it hit several weeks ago, and the bursting of the second tech bubble, is here to explain.

YTD performance of CTAs has been strong on account of their short S&P 500 equity exposure (see Figure 3). Over the last 2 days, short term (1-month) equity momentum turned positive, and limited CTA short covering likely contributed to the market rally. Overall, medium and long term equity momentum remain negative and are more likely to stay so. To turn momentum significantly positive, the S&P 500 would need to go significantly higher, which is hard given current EPS and multiple forecasts. With every additional week, short Oil and long USD momentum signals are becoming more vulnerable.

 

YTD performance of equity long-short Hedge Funds was likely dragged down by their net long equity exposure and heavy exposure to popular growth and momentum stocks. As a result, the HFRXEH index performed in line with passive investors (S&P 500). The momentum selloff in the first week of February negatively impacted equity quants who are on average overweight  momentum/low volatility factors. This has erased the positive performance of HFRXEMN index accumulated since August (Figure 3).

 

It is unclear how much of the momentum/low vol blow up has had to do with either the Citadel Surveyor unwind first noted here, or the dramatic drop in Pure Alpha performance and/or deleveraging.

Finally, here is Kolanovic on one of his favorite long positions: gold.

... recently established positive gold momentum is becoming more robust with time.

Which means the BIS will be busy doing everything in its power to halt gold's surging momentum higher, although even they may be powerless considering Goldman recently gave the "all clear" to buy gold when it advised muppets to go short the yellow metal.