For a long time Goldman Sachs have published a pair trade of momentum longs versus momentum shorts. It tells you what everyone who works in asset management knows - momentum is great until its not. We have once again entered the bloodbath stage of momentum investing.
It may look like this falls apart when the long book crumples. But back in 2002, everyone was short tech names, and these rallied, the short book caused problems back then. You can see that more clearly when you look at the momentum long part of this trade in isolation. Big falls in the long book are highlighted. Hedge fund long investing has generally been good.
But what really hurts is when the shorts move against you. These are highlighted below. And that is what we are seeing today - momentum longs falling and momentum shorts rallying. Keen eyed observers will probably recognise that the only time you really want a short selling fund is AFTER short selling has not worked - that is 2000, 2005, 2011, 2021 and maybe, 2026.
The GS momentum pair has dropped 40% from its June peak, and is back to flat for the year. I don’t know exactly what goes into GS Momentum Long Index, but we can use the data from a iShare Momentum ETF to get a good idea. Broadly speaking - AI trades are about 50%.
Typically in my experience this market action tends to cause weird behaviour all over the market - mainly as sudden arrival of risk in one part of a hedge fund manager book then requires risk to be cut everywhere. One area I am surprised not to see action is in currencies. Carry trade has had its best run since the 2000s.
And Yen shorts are at Max short levels. I would have suspected a Yen rally of some sort.
As are Swiss Franc shorts. I would also have expected a Swiss Franc rally of some sort.
Despite this, the dollar remains near one year highs. Given the centrality of AI to US growth in recent years - if stock prices are to believed, then short dollar trade should make a comeback.
I guess what I am trying to say, is that while all the action is centred on AI, the outlook for short selling and potentially short dollar trades look to be improving.
Alternatively, the AI sell off is purely positional - and this is not causing any problems in the rest of the market, because the weakness in AI stocks is not reflecting any real underlying weakness in the AI trade. If I would have to find a similarity to this market, it was the blow-up in the XIV ETF back in 2018.
This fund gave you twice the negative return of VIX, or essential selling VIX. It did well, but when a small shock came along, VIX doubled over night, and it went to zero. But the reason it doubled overnight was because it was so short VIX. There was no information content in the price action, other than the XIV ETF was a bad product.
The S&P 500 fell 10%, and then carried on up -the VIX spike was the death of a bad product rather than anything genuinely market related.
It does seem to me, that leveraged long memory ETFs are the new XIV. I think you need to see far more confirmation from markets to really believe something has changed, like a weak dollar, or change in bond markets..
