Some of Wall Street's Most Sophisticated Investors Have Missed Out on the Rally

  • Trend-following CTAs headed for worst yearly returns ever
  • Equity shorts covered at fastest rate since 2010: CS

Some of Wall Street’s savviest investors are being forced to reckon with their wrong-way bets on the U.S. election.

Prior to Nov. 8, trend-following quants, known as commodity trading advisers, pushed short sales against U.S. equities to a level beyond any time during the eight-year bull market other than in August 2015. It was a wager that the two consecutive weeks of declines heading into the vote would continue afterward.

That turned out to be a serious miscalculation, as more than $1 trillion was added to stock values after Election Day. To correct the error, CTAs, which use volatility and changes in asset prices as buy and sell signals, have been covering their short positions in U.S. equities at the fastest rate since the 2010 flash crash, data from Credit Suisse show. They’ve also bought up more long bets, according to the firm.

“That’s not just getting out of the way, that’s also a change in sentiment or direction as well,” said Mark Connors, Credit Suisse’s global head of risk advisory in New York. “Banks are up, the energy sector is up, crude is up. That bounced a lot of funds around.”

To be sure, not all CTAs had to reconcile wrongheaded bearish bets. Trend-followers that operate on longer time horizons were already buying stocks heading into the election. But automated funds that use short time frames were caught holding extremely bearish positions that they only began to unwind after the fact. It took a few days for the action to ensue, but it’s been a violent and costly move, Connors said.

The most immediate November short covering has ended by now. Of the hedge fund groups tracked by Credit Suisse, CTAs fared the worst in November, falling 2.1 percent for the month, putting them down 7.3 percent for the year. Unless they’re able to recoup some losses over the next three weeks, it will be their worst yearly returns since Credit Suisse began tracking the data in 1994.

Still, not all funds tracked by firm were losers on Election Day. Some were up for November. And equity long-short quants, which had been bullish heading into the election, were barely changed.

Credit Suisse bases its estimates on data from its prime brokerage account, which offers trading and other cash management services to hedge funds.