Wall Street Reeling Heading Into Weekend

The horrible start to the year has the BuySide reeling, and it is not confined to small-cap growth mutual funds who are down mid-teens year-to-date. The quants are taking it on the chin again, particularly those with price momentum strategies:

Price momentum strategies, which rely on things like analysts’ earnings guidance to make bets, lost 10.3% over Tuesday and Wednesday alone, including “a hugely bad day on Wednesday when it lost 6.4%,” said Matthew Rothman, Head of Quantitative Strategies at Lehman Brothers, who pointed to the liquidations at French bank Societe Generale (SCGLY), triggered by a rogue trader, as “a probable precipitating source.”

“To put Wednesday’s loss in context, there have only been six days since July 1950 with greater underperformance by momentum, all of which were in 2001 as the Internet bubble was popping,” he said Dow Jones

The bounce this week might alleviate some of the pain for funds with wider mandates, but the legends continue to drop like flies:

Bruce Kovner’s Caxton Alpha Equity fund, Lee Ainslie’s Maverick Fund and Leon Cooperman’s Omega fund rank among the $2 trillion hedge fund industry’s prominent losers in the first days of 2008, according to people who have seen the numbers.

The average global hedge fund lost 3 percent through the end of last week, according to Hedge Fund Research data, and that was before global markets plunged on Monday, when indexes fell 7.2 percent in Germany and 7.4 percent in India. U.S. markets were closed on Monday.

U.S. hedge funds specializing in stocks were off 5 percent on average through last Friday, according to data from New York-based Hennessee Group, which invests in hedge funds and tracks their performance.

“This month is going to be the worst start to the year for hedge funds in a very, very long time,” said Charles Gradante, a principal at Hennessee. Reuters

Momentum was a popular strategy in many quant factor models last year, but we noted that it had started to deteriorate in early January, which was tough to miss as 2007’s leaders started to stumble:

January 11th
Another volatile week on Wall Street has many questioning assumptions that were unassailable at the beginning of the week.

Yes, the recession talk has heated up. But we are concerned with something else, many quant models are flagging an important change in the markets complexion. And you don’t have to be a rocket scientist to figure this one out. Momentum is no longer working, and is turning into a bit of a scarlet letter. The dreaded M is not working in the factor models. It might be premature to write it off, but could signal a shift in leadership. Indeed, the former darlings are beginning to underperform on both up and down days. 1440 Wall Street

I don’t have much more to add to this. Gaming the August bounce was fun but this has been an exhausting week. With layoffs hitting even mighty Goldman, Mr. Market has Wall Street bent over the barrel.

Even Vegas is on fire; what else can go wrong?  Keep an eye out for locusts. This is a selloff of biblical proportions, and praying does not seem to work.

Clearly, the bears are having all the fun.

Peace Out!

Prominent hedge funds nurse heavy losses in 2008
Reuters

Momentum Faltering in Quant Models
1440 Wall Street
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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