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Just as the active strategies on TPP have recently changed their bias from short to long, one of the world's most famous investors is also hoping this is a buying opportunity for the longer term.
There's no denying that stocks went on a rampage at the start of the year. It didn't seem entirely justified, even though market commentators tried. AI fever was pronounced a thing and big tech flew with the investing world assuming they would make fortunes from the more advanced chips being produced by companies such as Nvidia and Advanced Mirco Devices. The CEO of Nvidia has become a rockstar; in fact he was recently photographed signing a fan's chest at a tech expo in Taiwan.
However, it now seems that investors may have gone too early as many companies who announced they were implementing 'AI', creating more excitement, haven't actually found a way to make any money from it. At the end of June, Goldman Sachs released a paper titled: 'Gen AI: Too much spend, too little benefit?' and it encapsulates our thoughts entirely.
Tech giants are set to spend over $1 trillion on AI capex in coming years with very little to show for it in the near term. This may be temporary, but it may also be the real reason for the recent sell off in big tech. We have no doubt that AI will contribute to the global economy vastly over the next 10 years, but what will it do in the short term? Probably not a lot in terms of profit generation.
A looming recession is being given the blame, but given that this is entirely based on one payroll figure that actually wasn't that bad, we are dubious. In fact, the payroll figure that has caused all the fuss was slightly better than the release in April. This hasn't been mentioned in the papers or anywhere else, but it's true.
Non farm payrolls in April was 108k, last month it came out at 114k and caused chaos. In Q2 the US economy expanded at an annualised pace of 2.8% up from 1.4% in Q1 and above the forecasts of 2%. This does not seem like a country ready to go into recession just yet.
Once market commentators get hold of something, they 'news' it to death. We see it all the time whether it's interest rate cuts, interest rate increases, inflation and now recession fears. What they say influences retail investors and they create the thing they fear.
In truth, there hasn't really been a great change in the chances of a recession. There was and still is a chance that high rates will cause an economic slowdown, but then that's the very reason they are high in the first place. The economy has been too strong which has fuelled inflation. It needed to be slowed, and raising interest rates is the only tool the Fed has to do this.
As the economy slows, the central banks will then cut rates accordingly. This is not a cause for panic, but the natural state and path of economics.
Having said this, one fact that can't be overlooked in the current climate is that tech stocks were very very high compared to historical averages. However, we now live in a world where tech is king and will continue to be for a very long time. What is next we don't know yet, but right now, tech rules the world.
So was it expensive, or justifiably in demand? We don't know. But, as we said at the beginning, many TPP traders have recently changed their long-term stance on it. Stocks were high, they continued higher and the traders remained short. Recently, we have had a much needed sell off, and that stance has changed.
Of course, stocks may continue to drop further, but one thing we can always be sure of is that they will eventually bounce back (the value of investments can go down as well as up of course, as can the stock market, but empirical evidence would suggest that up is the most likely long term path).
Many funds have been long and enjoying the ride. Quant funds that chase the hottest trades on Wall Street had a great start to the year, but they are now getting thrashed as momentum bets backfire all at once. It's not just stocks that have reversed, but bonds and currencies.
Going into July, trend followers were positioned for the year's big trades to keep gathering momentum: They were ploughing into stocks, betting against developed-nation government bonds and counting on the yen to keep weakening, according to Société Generale.
Then each of those markets moved sharply in the wrong direction, hitting them with deep losses. By one measure of 'Commodity Trading Advisors' (the name given to large quant funds using algorithmic trading strategies) nearly all of this year's gains have been wiped out.
"Everything went wrong at the same time," said Andrew Beer, founder of Dynamic Beta Investments, whose iMGP DBi Managed Futures Strategy ETF is down some 7% in August.
"This is a classic cross-asset reversal," he said. Most of the funds "have given back anywhere between half to three-quarters of their gains year-to-date within the past few weeks."
The reversal of fortune is underscoring the inherent risks in a strategy that proliferated during the recent bout of market calm and likely added fuel to recent swings as investors unwound crowded trades.
The trend-chasing strategy, which almost by design is exposed to rapid shifts in sentiment, had paid off for months as the US economy powered past the Federal Reserve's high rates, AI euphoria kept fuelling the stock bull run, and the yen was deflated by the Bank of Japan's loose monetary policy. But it was upended over the past few weeks, when the yen rallied, the BOJ hiked rates and a slowdown in the US job market rekindled recession fears.
"The repricing of the growth and interest-rate outlook at the end of June, coupled with the most recent concerns around US data created a sharp reversal," said Sandrine Ungari, head of cross-asset quant research at Société General. "This strong performance at the start of the year was mainly due to the upward trend in equities and commodities prices."
The diversified cohort of CTAs typically ride the momentum of futures markets of all stripes to harness the wisdom of the investing crowd, but nothing goes in one direction forever.
The quants who use long-term and mid-term time horizons for their trades have been hardest hit by the recent turn, according to Dynamic's Beer. Short-term funds, which seek to ride trends over the course of a few days, are down only 2.7% since the end of April compared with a 10.4% to the broader cohort, according to the SocGen index.
Systematic funds of all stripes have been forced to shed stocks and buy bonds at a frenetic pace in the latest rout, likely exaggerating the market moves. The cohort has sold $61 billion of global stocks and bought $205 billion of bonds from major developed countries in the past two weeks alone, according to an analysis by Nomura Securities International.
Even as the cross-asset turmoil calmed on Tuesday and Wednesday, the recent volatility signals cracks in the Wall Street consensus and creates difficulties for funds trying to seize on clear market trends.
"By definition they need trend," said Charlie McElligott, a cross-asset strategist at Nomura. "They ultimately are built to profit from the ability to monetize these breaks. But it's the choppy trend reversal markets which reduce the opportunity set for them."
The dumping of stocks by CTAs and retail investors has amplified the recent sell-off. On Monday JPMorgan noted that retail investors sold around $1 billion worth of stock. This was mostly in the big names where they have been fuelling the buying earlier this year. Retail traders buy stocks such as Tesla with no real understanding of actual valuations but do so with the belief that someone else will pay more. The mega-cap tech was trading in a similar fashion to cryptocurrencies at the start of the year.
When the market collapses, they sell out in a panic. So, is this therefore the perfect time to buy? It could be. It will be volatile, but it could also be profitable.
Certainly, this is the belief of many of the traders at TPP and a multitude of institutional investors such as Cathie Wood, one of the most famous tech investors of all time. In much the same way, both have been caught off guard by the initial rally in mega-cap tech this year but neither wants to miss out again when the buying begins anew.
Wood gained a following among retail investors in 2020 when her ARKK fund rose 150% amid a stellar year for tech shares. Despite a checkered record in the years that followed, including losses in 2021 and 2022, investors remained steadfast for a while, ploughing cash into the ETF month after month. But that fervour is dissipating.
Cathie Wood scooped up shares of tech firms caught in a crushing market rout, just as her flagship fund sank to a new 2024 low.
Wood's ARK Innovation ETF bought Amazon, Advanced Micro Devices and Roku, among others, stepping in amid a broad downdraft that spurred steep losses for many tech stocks. A fintech-focused fund of her firm Ark Investment Management also added Reddit and Meta according to tabulations put out by the firm on a daily basis.
The purchases happened at the start of the week, when global markets convulsed after weaker-than-expected US employment data fanned fears that the economy may be on the brink of a bigger downturn. Tech shares, which had powered the market in recent months, bore much of the pain, though most of the sector is still holding on to healthy gains for the year.
Not so for Wood's ARKK. The actively managed fund, which was already nursing losses for the year as the week began, has continued its slide, closing Wednesday at the lowest levels since November. It's down more than 20% this year and has seen some 75% of its value wiped out from its peak in early 2021.
With big wins, can come big losses and both ARKK and TPP have struggled with their flagship funds recently. However, buying now could well be a case of getting in when things look cheaper. Nobody is saying 'cheap' but cheaper is certainly better than the expensive valuations of recent months.
With the current buzzword being 'recession', stocks may stay subdued for the time being. It is impossible to know when the ride back up will start, but history tells us that it will eventually happen (past performance is of course no guarantee of future results).
It wasn't just TPP and ARKK buying the dip on Monday, Institutional investors saw $14 billion in net buying, 2.9 standard deviations above the 12-month average.
There was also strong demand for S&P ETFs, JPMorgan said, indicated by a $430 million inflow into Vanguard S&P 500 ETF, SPDR® S&P 500, and iShares Core S&P 500 ETF, which were +7.6, +1.2, and +2.6 standard deviations above their respective 12-month averages.
It would seem that a number of hedge funds feel this is a good time to buy.
Patience is a virtue in investing. It's a risky game, and rewards come to those who are bold, and patient. Warren Buffett has said many wise things in his time and he has two quotations that sum up this belief.
"The stock market is a device to transfer money from the 'impatient' to the 'patient'."
"Be fearful when others are greedy and to be greedy only when others are fearful."
Right now, the impatient are fearful. Stocks have collapsed. The Nikkei in Japan fell nearly 20% in 2 days. It had the biggest one-day fall since 1987, and that includes any fall during Covid. However, it seems to have now stabilised and maybe, just maybe, now is the time to be greedy.
What a week in the markets, but after the recent sell-off, the 'short sell' positions that had been pulling down the performance of the TPP active strategies over 2024 have been exited. At one stage, we did wonder if many of these active strategies would have to take a hit on these posititions but the selloff allowed for a much better exit point. With the overall bias now being a BUY, and with the last increment bought VERY close to market lows as they plunged, all of a sudden the outlook is very different. We would expect some short-term volatility around these levels, but as markets rise so will the value of ALL of our strategies at the moment.
Enjoy the rest of your week.
