"Entire Equity Universe In Turmoil": Hedge Funds Crushed As Value/Growth Unwinds
On Friday, in a prescient note observing the factor, style and sector rotations in the market, Nomura's head of x-asset strategy, Charlie McElligott explained why the most important trade of the past decade - growth over value - is now reversing.
One day later, as moves he pointed out last week accelerate, McElligott has published a follow up piece, in which he warns that the value/growth rotation is accelerating, while hedge funds and other members of the buyside are getting crushed, something Morgan Stanley touched upon earlier today.
Another day, another powerful rebalancing OUT of “Growth” (FAANG, Tech / Cons Disc) and INTO “Value” (Cyclicals / Resources)—thus disrupting the performance of “Momentum” strategies (-2.9% on day), broad “consensual positioning” across Equities funds (HF L/S model -1.8%) and spurring speculation of “quant fund unwinds” (Momentum Sector-Neutral -2.3%)
- However, it’s not just a one week phenomenon: “Cash / Assets” factor (-3.4% today) is the factor category poster-child of “Growth over Value”—and which from the low in U.S. rates in the Summer 2016 through March 2018 was +63.5% as a “market-neutral” strategy; however, since March 9th 2018, the factor is -8.5%
- Crowded “long Growth” (and “Momentum”) positioning is “tipping over” with 1) the negative “micro” earnings catalysts of last week sapping sentiment vs high expectations / “loaded” positioning, in addition to the “Value” macro drivers I’ve spoken about as well: 2) the current tactical steepening of the UST yield curve via BoJ “tweak” potential 3) the more-gradual tightening of US Financial Conditions and 4) Chinese outright easing / stimulus ‘pivot’ powering a potential Commodities / Cyclicals recovery (through infrastructure / fixed-asset investment)
- This overall “knock-on” is a “mean-reversion” across the factors, sectors and themes, driving broad “gross-down” / “net- down” flows throughout the Equities universe.
Some additional details:
AS INVESTORS SCRAMBLE TO SELL “GROWTH” AND REBALANCE INTO “VALUE,” THE ENTIRE FACTOR UNIVERSE IS MEAN-REVERTING VS YTD / START-OF-YEAR TREND:
“CASH / ASSETS” FACTOR AS PROXY FOR “GROWTH OVER VALUE” SEEING ITS LARGEST 3D DRAWDOWN SINCE THE “QUANT MARKET NEUTRAL UNWIND OF FEB / MAR 2016:
“MOMENTUM” = “LONG GROWTH / SHORT VALUE” (USING ‘CASH / ASSETS’ FACTOR AS PROXY):
SELECT ‘VALUE’ VS ‘GROWTH’ FACTOR CATEGORIES SHOW EXTENT OF THE 5D ROTATION (% RETURN):
THEMATIC-REVERSALS MEAN PERFORMANCE-DISRUPTION: