The selloff underscores the perils that funds face when they pile into the same stocks. Equity funds suffered after the top 10 stocks they’re most “crowded” in underperformed the S&P 500 Index by almost 3 percent on Oct. 29, the worst day since 2010, Morgan Stanley said. In addition, the top 10 stocks that funds bet against outperformed the index by more than 1 percent.
Funds that use computer-driven models to follow big market trends were whiplashed as price volatility spiked. Among the casualties: Leda Braga’s BlueTrend hedge fund, GAM Holding AG’s Cantab unit and Man Group Plc’s AHL unit. Other quant models that lost money include Renaissance Technologies’ U.S. equity fund.
Never mistake a bull market for brains is one of the most important pieces of advice anyone can receive when momentum strategies in all their forms are the most fashionable investment vehicles. If all algorithms are taught to do is remember the trend is your friend then automatic sell signals go in at the first failure of the price at the moving average. Meanwhile indices are generally market cap weighted so that ETF passive investing is essentially a momentum strategy biased towards mega-caps. Nevertheless, a crisis has to be seen to be getting worse in order to continue have a deleterious effect on markets and there is increasing evidence of volatility abating.Click HERE to subscribe to Fuller Treacy Money Back to top