Tuesday, May 19, 2009

The Sad Beta Of Affairs, And The SPY-IWM Unwind

Taking a cue from the Renaissance conference call, in which Jim Simons stated that the main reason for RIEF's massive underperformance was the fatal positioning with regards to stock betas (long low beta stocks, short high beta stocks), Zero Hedge decided to analyze the performance of stock by beta bucket. For this exercise, betas of companies as calculated by their January 1 to March 6 performance was lumped into various buckets (<0.5;0.5-1.0;1.0-1.5;1.5-2;>2.0) and the subsequent relative price performance was mapped out from March 6 through today.

Now market purists will of course say that the data itself is self-referential as high beta stocks obviously will outperform; however, the point of the exercise is to demonstrate how quant funds (which track backward looking beta) use proprietary signals which look at near term past beta, and how a vast majority (especially in the 175/75 to 190/90 neighborhood) got trapped in the mysterious futures buying rally over the past several months, with a resulting blow out to their P&L.

As is painfully visible, any funds that ended up being short the high beta bucket, for example REIF and other asset managers, got crushed recently. Now couple that with some pointed SEC sniffing around, a constant S&P futures bid, and some very angry investors after last Wednesday's conference call, and all of a sudden you may see some aggressive fleeing for the exits as a beta book gets unwound: high beta (garbage stocks) getting massively covered as low beta (utilities, healthcare) are sold off in droves to facilitate cash generation to satisfy redemption requests.

Throw in a little invisible SP puts buying and you get yourself the mother of all crap stock "bull" markets. Of course, the question of what happens once the forced unwinds end remains to be answered.

Also, we throw out the question, of just how peculiar is it that the Setauket fund's PBs (JPM and DB) are single-handedly dominating the demonstrated market in IWM trades today?

Lastly, juxtaposing a differental of IWM and SPY over the past few days, and one can i see some further oddities: IWM is significantly underperforming the SPY since mid afternoon yesterday when the rally really took off in earnest. Was someone accidentally long SPYs and short IWMs and had to quickly readjust?

hat tip credit trader
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