Source: Bloomberg The U.S. Stock Market Belongs to Bots
The U.S. Stock Market Belongs to Bots
By
Dani Burger
Widening gap between quants, fundamental long-short managers
Systematic strategies now fastest growing investment category
That money you see sloshing around in the U.S. stock market? It belongs to the robots.
At
least, that’s the picture emerging from a growing divergence between
quantitative funds and discretionary managers. Systematic strategies
have barely budged from near-record participation in U.S. stocks.
Meanwhile, fundamental equity long-short managers can’t afford to be
anything but picky, considering the market’s narrow leadership.
The
result: the largest gap on record between humans’ and computers’ gross
exposure to U.S. equities, data compiled by Credit Suisse Group AG show.
For now, systematic traders are the dominating force in markets.
“This is the largest footprint for quants. It’s a function of
allocation and leverage,” Mark Connors, global head of risk advisory at
Credit Suisse Group, said. “The reason why that’s important is that
they’re not going away. Complexity isn’t going to be rolled back.”
In
a sense, the divergence reflects the growing popularity of quant
methods over traditional strategies. Nailing down the exact size of the
quantitative space is nearly impossible, though some estimates are as
high as $500 billion. What’s more certain is that it’s getting bigger.
Quant is the fastest growing category on both Credit Suisse’s prime
brokerage platform and the broader universe.
Passive and
quantitative investors now account for about 60 percent of all equity
assets, compared with 30 percent a decade ago, according to data from JP
Morgan Chase & Co. The firm estimates that only 10 percent of
trading volume now comes from discretionary investors.
But determining whether this computer-driven force dictates
market moves is another matter. Quants on the Credit Suisse platform are
roughly defined as funds that invest in thousands of equities and trade
dynamics, rather than making stock-specific bets. Since they use
different signals and time horizons, their combined impact is likely
muted.
Finger Pointing
“Diversity of market participant
trading is a very important element of a healthy market. Quant funds
certainly add to that diversity, and I feel that is very good,” said
Jaffray Woodriff, co-founder and chief executive officer of Quantitative
Investment Management, which oversees $3.5 billion. “Funds that are
completely uncorrelated to everybody else and that also trade a lot of
volume are very good for the liquidity of the investment ecosystem.”
That hasn’t stopped some from pointing fingers.
Through Monday, the Nasdaq 100 Index had its worst two-day slide in nine months. Yet the strongest indicator
of whether a stock in the gauge tumbled was not its industry, but
momentum -- or the strength of a share’s gains over the past year. That
kind of proportionality is the hallmark of a systematic strategy that
unwound momentum positions, said Andrew Lapthorne, global head of
quantitative strategy at the bank.
Regardless of quantitative
investors’ behavior, fundamental managers are ceding whatever control
they have left. Gross exposure to U.S. stocks among equity long-short
funds, the largest category of discretionary investing, has dwindled in
2017 to near a record low. The closing out of short positions that
burned managers is partially to blame for that, according to Connors.
Increasing Leverage
Over
the past three months, the most shorted equities have outperformed
hedge fund favorites by nearly 7 percentage points, according to baskets
compiled by Goldman Sachs Group Inc. Meanwhile, narrow leadership has
made it difficult to hold bullish positions on a variety of industries.
“You
can’t get bigger if half of your book isn’t performing,” Connors said.
“They’ve had to be long tech because that’s all that’s worked.”
Then,
there are the quants, who hit the highest gross exposure to equities on
record around May 12, data from Credit Suisse show. It’s since come
down slightly, but still remains elevated. As volatility in the stock
market stays low, returns among quantitative strategies have been
compressed, likely compelling managers to increase their leverage to
juice up returns, Connors said.
Steady Exposure
Likewise, Quantitative Investment Management’s
Tactical Aggressive Fund, a $1.2 billion equity fund, has higher than
average gross exposure, according to Woodriff, who cited the low
volatility and high dispersion environment. That’s paid off, as his fund
rose 13 percent in May to round out a 55 percent gain for the first
five months of the year, according to an investor document seen by
Bloomberg News.
Even so, quants’ exposure tends to be more steady
than fundamental managers, said Maria Vassalou, head of Perella Weinberg
Partners LP’s Global Macro Fund.
“Discretionary managers come and
go, and can affect the volatility of the market more. When they take
risks, they sometimes bet the farm,” Vassalou said. “Quants focus on a
lot of assets that make up their portfolio. They’re less likely to be
impactful overall for any particular stock.”https://www.bloomberg.com/news/articles/2017-06-15/it-s-a-quant-s-stock-market-as-computer-programs-keep-on-buying
No comments:
Post a Comment