My name is Alyx Flournoy and I’m thrilled to join the Omega Point family as the Head of Product Specialists. For my first foray into Factor Spotlight, I’ll be continuing from last week’s look at the long-short hedge fund existential crisis by focusing on a dataset that is rising in popularity as an indicator of Retail Investor Sentiment. If you’ve noticed some unusual behavior in your long-short portfolios, it’s possible that market moving retail flows may be the culprit.
Retail investors are piling into the market in record numbers and taking advice from non-traditional sources such as Reddit’s WallStreetBets and PennyStocks.com. It’s quite possible that the investment behavior from these retail investors, which is typically speculative and not rooted in traditional investment theses, is deeply hurting traditional long-short strategies that are based on fundamentals.
Methodology for Creating a Popularity-Weighted Portfolio
The Robintrack dataset goes back to May 2018 and is updated on an hourly basis throughout each trading day. For our purposes, we grabbed a snapshot of the number of customers at the end of each trading day. To create the popularity-weighted portfolio, we started by evaluating the distribution of the Robintrack dataset. The data, as one might expect, is heavily skewed. Below are box and whisker plots at various points in time for the number of customers holding a certain stock.
The number of stocks covered goes from ~4000 at the inception of the dataset in May 2018 to almost 5500 names in July 2020. Though the portfolio does include some international names, it is largely a US domiciled portfolio and with 5500 names, covers more securities than the largest standard US market index. Given this, the size of the portfolio is large enough to operate as an indicator of the market in the same way as other standard and factor-based market indices. We’re off to a good start in terms of finding a broad-based signal that is representative of the market.
Diving Into the “Robintrack” Portfolio
We’ll evaluate the long, popularity-weighted “Robintrack” portfolio relative to the Russell 2000 since this benchmark was the best aligned on sector & market cap exposures. The Robintrack portfolio massively outperformed the Russell 2000 and was up by over 28% in the YTD period ending July 7. Though factor contribution was positive over this period, the alpha contribution really carried the performance and there was essentially no alpha degradation even during the March market turmoil.
Looking into the factor performance using the Axioma US 4 Medium Horizon model, we can see that recent usual suspects in terms of market moving factors (Volatility and Market Sensitivity) are definitely at play here. Overexposure to Volatility hurt performance during the market downturn in March, but this same overexposure allowed the portfolio to ride the rebound and ended the period with over 1% of performance contribution (red line). The portfolio was initially underexposed to Market Sensitivity but this exposure turned very positive in March and gave the portfolio 3% of performance contribution (blue line).
While factors overall gave the portfolio 8.3% in performance, this pales in comparison to the alpha, which contributed over 20% to active performance.
US & Global Market Summary
US Market: 7/13/20 - 7/17/20
Factor Update: Axioma US Equity Risk Model (AXUS4-MH)
Please let us know if you’d like to further discuss the Robintrack data or would like to analyze your portfolio and custom datasets through the Omega Point factor lens.