"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.

McElligott explains:



  • 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):


GROSS-DOWN:


THEMATIC-REVERSALS MEAN PERFORMANCE-DISRUPTION:

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