Quants rethink stock trading in the Manic era Reddit
(Bloomberg) – Between record buys and the roller coaster of Robinhood Markets Inc., the army of memes stocks is unleashed once again on Wall Street – making life harder for institutional professionals trading popular quantitative strategies.
With amateurs now controlling about a fifth of the volume of U.S. stocks, a cohort of systematic players suspect that the retail billions are undermining proven transactions like short selling and low-volatility investing.
The industry is in better shape from the dark days of the pandemic, and quantitative portfolios are more diverse than those managed by human stock pickers. Still, there is a palpable fear that the Reddit generation will grow strong enough to disrupt the market models that underpin math-based allocations.
Quants like UBS Group AG and Campbell & Company are trying to ride the waves of the retail market by incorporating trading activity into their models. But the penchant of day traders to chase down seemingly random businesses and move quickly like a herd means that it’s not so easy to guess a systematic method in madness.
“As households start to own more and more stocks, there are certainly different models in the market,” said Mani Mahjouri, chief investment officer at quantitative hedge fund Blueshift Asset Management. “Retail investors who come in for whatever reason have greater utility for risk than typical institutional investors. “
Stock-to-options trading activity surged last year as a new horde of investors filled with stimulus cash signed up on commission-free platforms like Robinhood. While their participation has declined since the GameStop Inc. frenzy in January, it remains above pre-pandemic levels, even as the stimulus check wears off and the stay-at-home era peaks.
For Mahjouri, retailers’ appetite for volatile names like Tesla Inc. is contributing to the strong underperformance of a popular investing style known as low volatility, which fell out of favor when risk reopened. . A market neutral Dow Jones index for defensive strategy has fallen for five straight quarters through June, falling 33% in its worst string of declines in more than a decade.
As the performance of quantitative funds has improved this year as a greater appetite for risk has boosted transactions like value stocks, the concern is whether the Reddit cohort is fueling a lasting shift in market trends. .
Take the short sale. The wisdom received at quantland is that short sellers know something that others don’t – and the more willing they are to pay for their bets, the better their information is likely.
Still, a Goldman Sachs basket of the most shorted US stocks jumped like never before to outperform the broad market by 31 percentage points this year. The retail purchase of the most courted names by hedge funds in 2021 like AMC Entertainment Holdings Inc. and GameStop is shaking up once popular quantitative trading.
It is difficult to disentangle the many forces driving pandemic commerce amid a record stimulus, but academic studies have chronicled the growing influence of retail investors in the broader stock market. One suggests that breeding by users of trading apps leads to massive same-day returns that eventually run out. Another article shows that chatter on message boards boosts retail activity, fuels higher earnings, and deters short selling – all in the short term.
Read more: Every Daily Trader’s Dollar Is Worth Five In New Stock Theory
While quants typically seek to exploit behavioral quirks and stock volatility, identifying retail flows in the first place in order to understand price patterns is a difficult task, with brokers being among the few directly in the know.
Man Group’s hedge fund advisory unit in its Q3 outlook recommended reducing exposure to quantitative equities tied to a narrow set of strategies, such as those that rely on weird price moves back to normal – thanks to the haphazard and volatile nature of buying and selling.
“Based on historical models, a quantitative strategy might assume that these stock price movements are a deviation from a fundamentally justifiable value,” said Jens Foehrenbach, chief investment officer of Man FRM. “But if the retail flows keep pushing the price in the same direction, the strategy is likely to take losses on this trade.”
The fact that quants adapt to equity traders even underlines the new power of the contingent. Systematic investors tend to manage portfolios with a wide range of securities and long-standing risk controls that should protect them from the large swings of a handful of stocks. In contrast, discretionary fund managers run a greater risk of having large exposure disrupted by the military r / WallStreetBets.
Today, alpha-seeking quants and stock pickers are behind a boom in alternative datasets, scratching Reddit or Twitter for the first signs of the next retail favorite as Sundial Growers Inc. or Advanced Micro Devices Inc. In a survey of 100 hedge fund managers overseeing $ 231 billion conducted by SIGTech, nearly three-quarters said they had increased data usage on social media and chat rooms. over the past year.
Campbell & Company’s Managing Director of Quant Equities, Brian Meloon, is among the systematic players now incorporating signals on trading activity, including likely retail flows, to guide a stock selection model managed by the fund $ 2 billion quantitative speculative.
Likewise, UBS’s quantitative investment strategies team recently revamped a stock-momentum product to incorporate flows from the bank’s retail market-making desk. The idea is that instead of just chasing the best-performing stocks, the UBS offering also tracks the day-trader cohort’s prowess when it comes to market developments.
Still, this is just the start, the quants are just beginning to struggle with the stamina of the Robinhood mob.
“Themes like stocks ‘meme’ and social media have introduced greater short-term volatility in some equity clusters,” said Spyros Mesomeris, head of QIS structuring at UBS. “This reflects the growing influence and participation of the retail industry in the stock markets.”
(Updates with everything in search, context.)
More stories like this are available at bloomberg.com
Subscribe now to stay ahead of the game with the most trusted source of business information.
© 2021 Bloomberg LP