We hope you’ve been weathering our new shared reality of extreme market volatility and social isolation, and that you and your loved ones remain healthy and safe.
We continue to believe that the polarization in Beta is one of the most salient trends of the current market environment, and will be discussing it in greater detail on the webinar.
As much of Wolfe Research’s analysis focuses on Hedge Fund Crowding; here is a look at how that factor has performed since the beginning of February:
If you’d like to see your own portfolio’s exposure to the Hedge Fund Concentration factor, please let me know and we’ll set you up with trial access to the Wolfe model.
A Deeper Look At Runaway Beta: Industry and Company Views
As a reminder, last week we showed how return for the Axioma Market Sensitivity (AKA Beta) factor has gone parabolic over the past month. Here’s an update to the chart:
Cumulative Return: Axioma Market Sensitivity (2/19/20 - 3/19/20)
We also discussed the polarization of Beta - in other words, market sensitivities are running away in both the positive and negative directions. We now want to highlight how this drastic shift in beta has looked at the industry level, and provide a couple of examples of individual securities that have experienced these shifts.
Identifying Securities and Industries with Runaway Beta
We began by filtering the Russell 3000 for securities that experienced large shifts in beta exposure in the past 6 weeks. We define a large positive shift as a greater than +1 change in the beta exposure of a security (e.g. +1 → 2) and a large negative shift as a less than -1 change in the beta exposure of a security (e.g. -1 → -2).
This largely helps corroborate some common sense theories - Biotech names have become lower beta as the world waits for a COVID-19 treatment or vaccine to emerge from their labs, while Hotels, Restaurants, and Leisure names are becoming higher beta for obvious reasons. Now, let’s see how this looks at the individual security level for a few names.
Gilead’s exposure to Market Sensitivity started the year at a virtually neutral -0.04, and dropped to a recent trough of -2.24 on 3/6. It’s since come back up to -1.28, which still represents a big negative move from where we started.
Beta exposure started the year at 1.07 and has since moved up to a current high point of 3.1, meaning that shares are currently 3x more sensitive to moves in the market.
If you would like to see the full list of names in the positive and negative beta filters, or any of these industry portfolios, let me know.
US & Global Market Summary
US Market: 3/13/20 - 3/19/20
Factor Update: Axioma US Equity Risk Model (AXUS4-MH)
Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Please let us know if you’d like to discuss runaway Beta in more detail; we hope to see you on this week’s webinar as we continue to dig into this phenomenon.