"This Is A Paralyzed Market": Hedge Fund Turnover Drops To All Time Low

Back in July, Canaccord analyst Brian Reynolds put out a contrarian piece which broke with numerous conventional wisdom norms about the state of the market, key among which was that traders are not complacent, but rather - in light of collapsing trading volumes, something which has plagued bank income statements in the past 2 quarters - simply paralyzed, as they no longer have a grasp of financial "logic" when it is all superceded by central bank liquidity injections, and as such most trades feel fake, forced and just part of the FOMO charade to avoid losing one's job.

As Reynolds explained, "Investors are not complacent. Their stances range from extremely aggressive to bearish" and added that these "opposing forces have led to a compression of volatility. When stocks have rallied strongly, they have then been met with investor selling. When stocks sell off, the buybacks have picked up after the selling runs its course. That has been the case for more than eight years. Those forces have led to an equity bull market that moves higher in fits and starts, with some brief pullbacks from time to time. Given the positioning of equity investors and continued flows into credit, we do not see that pattern changing for some time." Meanwhile, sandwiched inbetween these two trends, investors - both retail and institutional - find themselves in trade limbo, and the outcome is a gradual decline in trading volumes "which is more reflective of paralysis than complacency among equity investors."

And while one can posit theories explaining this bizarre market until one is blue in the face, the most vivid confirmation of Reyonld's "paralysis" thesis emerged in the latest batch of hedge fund 13Fs, which was analyzed by Goldman earlier this week, and noted here in "These Are The Top 50 Hedge Fund Long And Short Positions."

In the report, Goldman highlighted various notable outliers, such as the latest record high in hedge fund leverage...

... coupled with the recent plunge in short interest (which as a share of S&P 500 market cap sits just below 2.0%, matching January of this year as the lowest level since 2012)...

... even as hedge fund "crowding" in a handful of top names hits an all time high:

But the most interesting to us, and the hedge fund community, we believe is the following chart, which shows that hedge fund portfolio turnover continued its downward trend and reached a new record low in the third quarter Across all portfolio positions, turnover registered 26% in 3Q. Turnover of the largest quartile of positions, which make up the vast majority of fund portfolios, fell to just 13%.

This means that once hedge funds have established positions, they no longer trade in and out, but simply lean back and let it ride. And why not: with the most popular hedge fund positions this year being also the best performing ones, namely Facebook, Amazon, Alibaba, Alphabet and Microsoft, why ever both selling.  Indeed, as the next chart shows, the bulk of the collapsing turnover is largely due to tech stocks:

Of course, this strategy of loading up on winner and letting them ride is a two-edged sword. while it is the best strategy on the way up, it also becomes a quasi private equity strategy, in which the price formation is created on the margin with increasingly less volume. And, since such tech holdings are becoming ever more illiquid, the threat is what happens once the narrative shifts and instead of buying, hedge funds start to sell these most concentrated of growth names. One could say that a tech selloff is emerging as one of the more concerning black - or at least gray - swans in the market. In fact, we are did say just that...


Nomad Trader Fri, 11/24/2017 - 20:38 Permalink

We can only hope that one day financial markets return to a state where knowledge, experience and prudence is rewarded over buy and hope, dumbluck, and ignorance.

Yen Cross Fri, 11/24/2017 - 21:06 Permalink

 Tyler> you sound like the last 'pride' female on the Serengeti, calling out for help... The banksters know/ knew this was coming.  Everyone thinks they're expert investors.  Everyone knows where the "EXIT" door is. lol    I'll hold my cards, because I paid cash for them, and they're backed by 5toz silver bars. * I read all the charts.

coast1 Fri, 11/24/2017 - 21:17 Permalink

sorry guys, I have not posted much an usually make one liners, but I am pissed...I was listening to alex jones today and what a loser..He becoming MSM....Yes, he gets some breaking news but he should take a vacation and STFU...According to him, the economy is great now, 160 million new jobs etc...Seems when obama was president, jones disagreed with government stats, but now that trump is president, the government stats are true....And from my knowledge, there have been no pedophiles arrested thru efforts of trump.  I could go on and on...I am not blaming trump for economy, he took over the titanic 5 minutes before it hit the iceberg.  But dear Jesus, alex shut up!  I really cant think of anything Trump has done good yet..Selling weapons to saudi arabia so they can bomb Yemen?  Tarriffs on China, that will never happen...I truly hoped trump would do well, but thinking he is a trojan horse..I also know he has a mess on his hands with ..I suppose I still have a bit of hope, just sick and tired of infowars maybe...thx for listening :-)

Colonel Shitze… coast1 Fri, 11/24/2017 - 22:36 Permalink

Jones knows he’s a scammer, Whether Trump believes his own shtick or not, dunno, but believers are in for a monumental disappointment If it’s not crystal clear already he’s not who you believed him to be. Not even close, go back 5,10,15 yrs & dig into his political beliefs & positions on issues. Some will say he converted into current Trump, but facts & reality, and his actions will leave no doubt who and what he is. I’m glad America’s fed up w the pols of both parties, but Trumps not the solution. He’s a chameleon & salesman w/o a soul or anything resembling integrity & honesty. ***rant transmission complete***

In reply to by coast1

SheHunter Colonel Shitze… Fri, 11/24/2017 - 23:03 Permalink

Had to login just to agree with you and throw in my 2 cents.  Many of us who voted for Trump are in the middle of a relationship where we know the other one is screwing around on us but we do not cannot admit this to ourselves.  So we hold our breathe, make excuses and on a day, any day when the relationship seems to have a slim glimmer of hope we applaud and kiss and dance around.  President Trump is a 180 degree from candidate Trump.  President Trump is increasing our involvement in third world country wars and ignoring those of us here at home.  His home too.  He is all talk...all bluster...all ego.  Little action.  I do not care if players sit during the anthem and I expect elected Trump to focus his energy, prowess and efforts elsewhere as well.

In reply to by Colonel Shitze…

A1 T Fri, 11/24/2017 - 22:57 Permalink

More charts leading to nothing. Lookan at any analysts past record. Up to this point the only analysis with a solid record is shitwave. As much as I hate to admit it.

A1 T Sat, 11/25/2017 - 03:07 Permalink

Does  this mean the markets will crash now?  Doom for a 600% rally in stocks. Zerohedge is bound to get it right at some point.

Grandad Grumps Sat, 11/25/2017 - 03:10 Permalink

There are no investors, only insiders and outsiders. The insiders have their profits assured by the machines and the outsiders have their losses assured by the machine.