The recent market rally that started on March 10th caught most equity quant fund managers by surprise, and it is turning out to be painful for the vast majority of them. This, in turn, may wind up bringing the stock market rally to a screeching halt.
Barclay’s analyst Matthew Rothman wrote in a recent note to clients that he after talking to 80 quant fund managers, he discovered that only one was up since March 9th. The majority admitted to being down during the rally.
“It is fair to say that just about everyone is bewildered and trying to understand when this rally will end,” Rothman writes.
So why should you care about the quants? Because they play an important role in the markets, and changes in their activities can have effects on the broader markets.
Merrill Lynch analyst Mary Ann Bartels says that quant funds have been reducing their market exposure at accelerated rates since late March, a couple of weeks after the rally began. She warns that this could lead to a surge in volatility since quantitiate hedge funds provide volatility smoothing liquidity to equities markets.
Zerohedge says that the market rally could be building us to the “black swan of black swans” from this apparent quant unwind, with markets crashing around violently.
Rothman writes that the rally is “over-extended,” warning his clients that a pullback should be expected in late April.
“Think of a rubber band. What we are trying to identify is when the rubber band has been stretched far past its normal state. We believe unambiguously that we are at that point today,” he wrote yesterday.