Hedge Fund Sell-off

“Through the first two months of the year, long/short equity hedge funds and mutual funds were neutral the market but long growth stocks, which helped underpin outperformance through the January-February sell-off. The rotation out of growth and into value starting in early March hurt and funds were forced to unwind positions.” (Deutsche Bank)

Hedge Fund Performance

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No Breadth to this Sell-Off

“Each of the market reversals of the past few weeks has in common that they represented widely held positions — long equities, overweight small caps, overweight tech, underweight emerging markets, and short duration. If there were greater worries about the economy or other downside risks, then we should have seen the dollar rise, credit and swap spreads widen, and emerging markets underperform. Correlations across risk assets should have risen. None of this has happened. There is no breadth to this sell-off.” (JPMorgan)

No Earnings

“In the Russell 1,000, there are 85 stocks in the index with negative trailing 12-month P/E ratios (negative earnings). Those 85 stocks were down an average of 1.78% today (friday), and they’re down an average of 3.9% over the last month. The other 932 stocks in the Russell 1,000 were down just 20 bps today on average, and they’re up an average of 2% over the last month.” (Bespoke Investment Group)

Fear of Missing Out

Retail investors have been pouring money into stock mutual funds. The fear of missing out on the sixth year of a bull market has created something close to a buying panic (although not as maniacal as we saw in 1999). Fundamentals are being ignored. The ten biggest months of capital inflow to the equity market (all equity mutual funds and ETF:s). Seven of the ten largest inflows occurred either in 2000 or 2013.

S&P 500

Low Valuation Stocks Underperforming

“Investors have stopped rewarding low valuation stocks. Our Valuation Micro Equity Factor, which measures the sector-neutral performance of low vs. high valuation S&P 500 stocks, rose by 15% in 2013. This trend has reversed in 2014, however, with low valuation stocks underperforming by nearly 500 bp YTD.” (Goldman Sachs)