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Fall of Big Tech boosting stock quants on Wall St


New York: Another drop in tech is a boost for stock quants trying to make a big comeback in a bad year for Wall Street.

Last week, as the Federal Reserve made more hawkish comments about still-raging inflation, the once-booming FAANG mega-caps lost another US$568 billion (RM2.7 trillion) in market value, bringing the group’s total market cap to its lowest level since mid-2020.

Rising interest rates have put an abrupt end to Big Tech’s dominance. As a result, the biggest tech companies have less and less influence over broader indexes, and former high-fliers like Meta Platforms Inc. and Inc. are falling again in the latest wave of selling.

In the opposite direction of the extremes of the “cheap money” years, the capitalization-weighted S&P 500 hit its lowest level since 2019 when compared to an equal-weighted version of the benchmark.

All of this is good news for so-called “factor investors,” who break down stocks based on how cheap they look and how quickly they’ve gone up.

Most of the time, these funds don’t put too much money into the biggest tech companies, and they tend to spread out their investments. This is a good strategy now that the market is more diversified.

Dow Jones’ market-neutral indexes show that when the S&P 500 fell more than 2% in 11 of the last 13 sessions, popular factor fund strategies like value, quality, momentum, and low volatility all made money.

“You have a much more diverse set of opportunities, which lets more factors come into play,” said Sean Phayre, head of quantitative investments at Aberdeen Investment Management. “Before, the market for 2019 and 2020 was very one-dimensional.”

Managers who use factor strategies in one way or another in a systematic way are on a roll.

Since October, the QAR Equity Market Neutral Fund has gone up again, giving it a 21% gain so far this year.

During the tech bull run, the Jupiter Merian Global Equity Absolute Return Fund lost money. However, it is now up nearly 7%.

Wall Street mathematicians crunch numbers to find patterns in the whole stock market. That means that most of the time, they spread their bets out over a huge number of securities.

So, when most of the market gains are in a few large companies, quants will almost always own a lot less of those shares than a cheap and easy S&P 500 tracker.

This was the case when interest rates were low and the bull market was led by the FAANG block (Facebook Inc., now called Meta, Apple Inc.,, Netflix Inc., and Google’s parent company, Alphabet Inc.).

Now that there are more winners, money managers have more chances to make money. Even though half of the FAANGs fell in October, the S&P 500 went up by about 8%, which was the opposite of what was happening before 2021.

A popular quantitative trade, the momentum factor, has recently joined the party. This style of investing is like a chameleon: it just bets on the winners of the past year. It doesn’t do well at turning points like the beginning of 2022.

But after rebalancing into stocks that did better, like those in healthcare and energy, the strategy has gone up this quarter. This is a sign that inflation is keeping trends going for a long time.

The US$12 billion (RM57 billion) iShares MSCI USA Momentum Factor ETF (ticker: MTUM) got a record US$2 billion (RM9.5 billion) in new money last month. This was because its 13% rise was the most impressive in its nine-year history, beating the market by the most.

Bloomberg has put together a market-neutral version that is on track for the best year since 2015.

Christopher Harvey, head of the equity strategy at Wells Fargo, wrote in a note, “Momentum is the all-weather strategy.”

He thinks that inflation and job data will continue to hurt the market, and he recommends momentum strategies because “they tend to work well” in tough times.

Harvey says that this season, 87% of high-momentum firms have beaten earnings expectations, while only 70% of the S&P 500 have done so.

These winning names are also getting more praise and less punishment for good and bad results.


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