Business & Investment

Momentum quants unleash “the most turbulent rebalancing ever”

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(Bloomberg) — One of the most successful Quants strategies of the decade is ready for a dramatic March makeover that threatens the new volatility of the already moving stock market from the tech stock turmoil.

Almost a year after the S & P 500 hit Covid’s spurred lows, momentum investors went to lockdown’s favorite megacaps and stay-at-home orders to join the cyclical stock boom. It is set to reduce the exposure of.

Zoom Video Communications Inc. reduced, Exxon Mobil Corp. Please increase.

Rule-based allocation styles come in a variety of shapes and sizes, but these traders typically lengthen winners and short losers in the last 12 months or so.

Wall Street forecasts suggest that they are ready to add stocks that have led to economic expansion, such as value, while cashing out defensive names that are no longer endorsed by policy stimuli and vaccine bets. ..

This means that every corner of the $ 2 trillion factor investment world will undergo potentially confusing rebalancing.

“The violent downdraft (and subsequent rebound) in March last year is ready to create the most turbulent rebalancing ever for a momentum-based strategy,” Warren Pies, founder of 3Fourteen Research, notes. writing. “The underlying portfolio changes are dramatic and could empower specific sectors over the next few months.”


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According to research firms, the portfolio that buys the top 100 winners of the S & P 500 is expected to have the highest sales in at least 30 years if it is rebalanced in March. We estimate that sectors such as consumer discretion, energy and finance will drive the most inflows, with technology and healthcare driving the outflows.

It will increase the periodic exposure of momentum trades designed in this way to more than 60% compared to the peak of about 40% in 2020.

Due to rising bond yields and valuation concerns, the Nasdaq-100 index was sent to the correction zone this Thursday, about 10% below the February 12 record.

The S & P 500 is struggling to maintain profits this year thanks to its high tech, but there is a turn under the hood. Energy, finance and industry are among the top sectors this week. Mostly value companies that were hit by the sale of Covid a year ago.

Read more: Nasdaq 100 avoids modifications slightly as tech stocks sink

In fact, value has skyrocketed 25% since vaccine advances boosted hopes for a resumption in early November, and momentum plummeted 28% in the sharpest top-to-bottom drawdown since the global financial crisis. The Dow Jones Long / Short Index shows.

This is a sign that trend-following factors are now being titled for recent losers such as technology and healthcare.

“Signal sales are high,” said Edward Gladwyn, portfolio manager at Unigestion SA, rebalancing the factors quarterly. “Sure, integrating fallout after Covid last July is more than sales.”


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After shock

These quantitative movements can spread to a wider range of benchmarks. Momentum is popular within a systematic community of about $ 2 trillion that groups stocks by characteristic, an approach known as factor investing. Exchange-traded funds that have gained momentum have ordered $ 20 billion in the United States alone.

All rebalancing depends on how the factors are defined. Most commonly, quants look at price fluctuations over the past year minus the most recent month. More complex styles tend to short the loser while lengthening the winner.

Some portfolios are rebalanced monthly. Other investment trusts, including major momentum ETFs, do this quarterly or semi-annually. This suggests that more cash will be added to the circular rotation at the end of March this year.

All of this can be comfortably absorbed into the market on normal days. However, if a sufficient amount of quants sell the same stock at the same time, there is always the risk of increased transaction costs and price volatility.

These “tuned flows” can be “causes of pain,” said Gladwyn of Unigestion.

Indeed, the overall technological improvement in 2020 means that it will continue to be strongly represented in a vibrant portfolio. However, this type of investor has the potential to reduce its exposure in order to give way to things like materials and finance that are performing a strong comeback these days.

A less fan-obsessed market may be good news for some factor funds. After a rally led by Amazon and Microsoft in this world made it difficult to make money without a large bet on these megacaps, many condemned Big Tech’s dominance due to the so-called Quants crisis in recent years. did.

Value equity, which has been struggling famously in recent years, is finally seeing a ray of light. This is a benefit for systematic funds with a wide range of exposures.

Jon Quigley, Chief Investment Officer for Disciplined Equity at Great Lakes Advisors, said:

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Momentum quants unleash “the most turbulent rebalancing ever” Momentum quants unleash “the most turbulent rebalancing ever”

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