The stock market may appear tranquil again after a rollercoaster summer, but many analysts and investors are unnerved by violent moves beneath the surface, reviving memories of the 2007 “quant quake” that shook the computerdriven investment industry.
The FTSE All-world equity index has rallied almost 3 per cent already this month, clawing back some of August’s losses. However, many highly popular stocks suffered a sudden and brutal sell-off this week, a reversal that analysts have already dubbed the “momentum crash”.
The blow was particularly strong in the US, where strong-momentum stocks — those with the best recent record — tumbled 4 per cent on Monday, in the worst one-day performance since 2009, according to Wolfe Research. Only once before, in 1999, has such a rout afflicted momentum-fuelled smaller company stocks, according to investment bank J.PMorgan.
“This is massive,” said Yin Luo, head of quantitative strategy at Wolfe Research. “This is something that we haven’t seen for a long time. The question is why it’s happening, and what it means.”
The flipside has been a dramatic renaissance for so-called “value” stocks — out-of-favour, often unglamorous companies in more economically sensitive industries. The S&P value index has climbed about 4 per cent this week and, compared with momentum stocks, enjoyed one of its biggest daily gains in a decade on Monday.
In essence, almost all of 2019’s hottest stocks have taken a hit, while the year’s most unloved dogs have enjoyed a roaring rally. Pravit Chintawongvanich, a strategist at US bank Wells Fargo, points out that the worst 12-month performers in the Russell 1000 equity index were up by the most on Monday, while the best 12-month performers were down the most.
This hurt many investors. The median long-short equity hedge fund — a strategy that strives to beat the market by picking winners — had lost 1.8 per cent in the month by the end of Wednesday, while computer-powered quantitative hedge funds have declined 2.3 per cent, and trend-following funds have shed 3.1 per cent, according to investment bank Credit Suisse.
Such a seismic rotation in investment “factors”, essentially the different groupings of stock market characteristics identified by financial academics, is rare, and reminiscent of a violent bout of turmoil that struck in the summer of 2007.
On August 6 2007, the quantitative investing industry, whose computer scientists used trading algorithms to systematically mine markets for money, suddenly and mysteriously saw their models go haywire, racking up huge losses for many “quant” powerhouses from Goldman Sachs Asset Management to Renaissance Technologies. A graphic with no description The turbulence lasted only a week and was later overshadowed by the financial crisis. But the event quickly became known as the quant quake, and remains etched in the memory of many hedge fund managers.
