From FT7 Aug 2022 12:26
Another way to think about this is to question who was doing the buying. A good chunk of it seems to have come from funds that were extremely bearish, with lots of shorts — or bets against stocks — on their books. Hedge funds and momentum chasers such as commodity trading advisers — CTAs — had backed well out of risky assets and then scrambled to catch up when stocks turned higher, a practice known as short covering.
“The equity bounce?.?.?.?in July was mainly due to short covering,” wrote analysts at Barclays. “The most shorted stocks have indeed outperformed in Europe and the US.”
An equally weighted basket of the 50 most shorted stocks in the Russell 3000, “led by the more speculative?.?.?.?non-profit names”, has climbed by some 31 per cent since June, says Neil Campling, an equities analyst at Mirabaud, with Europe now catching up.
Anik Sen, head of equities at PineBridge Investments, is what you’d call a bottom-up investor, building portfolios focusing on a relatively small number of stocks — 30 to 40. His mission is to pick the good stocks and neutralise the effect of wider moves in indices. That task, he says, is increasingly complicated by the oversized role played by equities flows from macro funds and from CTAs.
“I’ve been doing this for more than 35 years, close to 40 years. The disconnect between bottom-up and top-down is possibly the widest I’ve seen,” he says. “Markets are not being moved by you and me but by macro traders?.?.?.?[Their flows] dwarf those of fundamental investors.”
This cuts both ways. Sen’s view is that July’s rally is “sustainable” and that markets have been overly gloomy for much of this year. Some corporate stories are much stronger than investors give them credit for, he reckons. “We can’t understand why markets are so negative,” he says, adding that the war in Ukraine, inflation, supply chain strains and China’s Covid shutdowns have masked otherwise positive factors.
But the drab performance of mutual funds in July underscores how broad asset allocation shifts pinned to powerful macro trends are railroading stocks specialist
My sense from talking to fund managers is that this is becoming extremely frustrating. They were wrong to be so positive at the start of the year and then they missed a trick in July. The best approach now is probably to be somewhat philosophical.
“You can easily be caught up in short-term movements,” said Mamdouh Medhat, a senior researcher at Dimensional Fund Advisors, the quant house founded in the 1980s. “It’s like a ping-pong match and commentating on every hit of the ball."
Boring as it sounds, sticking with markets for the long term is still almost always the best tactic.
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