Several days ago we posted an update to our favorite trading strategy since 2013: namely betting on the stupidity of the “smart money” and going long the most underowned and hated names, while shorting the most owned ones (recall from September 2013: “”Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate “Alpha“”). As Bank of America confirmed three years later this past Wednesday, this indeed remains the best alpha-generating strategy. Here is what BofA’s Savita Subramanian said:
As flows from active to passive funds have accelerated, one strategy that has worked unusually well for the last several years is a simple positioning trade of selling the 10 most overweight stocks and buying the 10 most underweight stocks by active managers. This single trade has yielded over 16ppt of alpha year-to-date. And implied derisking/ outflows on Brexit alone have been fierce, with the same strategy generating 5.2ppt of alpha just since last Thursday’s close. Even if Brexit’s impact on funds is limited from here, we believe that crowded stocks will likely continue to underperform neglected stocks: a whopping two-thirds of US large cap AUM still resides in active funds – there is likely a lot more to go in the rotation from active to passive.
Here is the proof: “the Top 10 most overbought stocks have trailed the S&P for each of the past three years, while the Top 10 “most neglected” stocks outperformed the S&P on average by 11.6%.”
However, while we would be delighted to take this latest opportunity to gloat, there is a more troubling undertone to this data. Indeed, while we sarcastically pointed out back in 2013 that with the Fed (and now every other central bank) as the market’s Chief Risk Officer, there is no longer a need for anyone to do fundamental analysis, this has not only come true but the outcome is now is far worse. Because it confirms what we have said all along: not only is there no market left aside from what Central Banks decide will happen to “risk assets” on any given day, but the smart money – both hedge and mutual funds – have now completely lost the plot.
For the evidence look no further than the charts below: the first two charts show the relative performance of Goldman’s Hedge Fund VIP basket, the same stocks that comprise the most popular holdings among US hedge funds. Incidentally, this is also the same holdings which back in February we reported that Goldman was trying to make into an ETF in an attempt to offload the most concentrated hedge fund holdings into muppet hands (it failed) and which we added 5 months ago that the “the guaranteed way to make money with this ETF would be to short it” We were right.
The second chart shows that, as we said in 2013, the best offsetting strategy remains to go long the most hated names. It has been pretty much straight up ever since.
Only it’s not just hedge funds: despite what they may profess on twitter, the reality is that nobody has any idea how to trade this so-called market any more. Enter mutual funds, whose performance has been just as deplorable if not even worse than that of hedge funds.
So does any strategy aside from doing the opposite of what everyone else is doing work any more? The answer – and as the charts below prove – is no.
Putting it all together, here is a quote from Bank of America: “the anticipation of central bank support – the key to reversing every major stress event since 2013 – has been strong in recent days. Given the critical role of central banks in supporting markets in recent years, a loss of credibility remains the biggest visible tail risk, in our view.”
For anyone still left in this s-called market, we urge you to pray that “key man” Janet will be safe and sound for years to come, or else.
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