Did COVID Cause Institutional Investors to Change Their Strategy?

We’re excited to announce that we’ve recently added Wolfe Research’s new US Broad Equity Model to the Omega Point platform. Our team has already taken a deep dive into the new model, which includes fundamental, technical, and alternative data factors, and it’s clear that it can be of significant value to any investor seeking to better explain systematic risk and return dispersion in the US markets.

This week we’ll focus on a topic we were especially keen to investigate: how did institutional investors reposition their portfolios during the COVID crisis?

Wolfe Research Hedge Fund Barometer Portfolio:

To model institutional investor flows, we use Wolfe Research’s hedge fund proxy portfolio constructed as follows:

• Long Leg: The aggregate of 13F filings (long only) for ALL hedge funds from the 12/31/19 and 3/31/20 SEC reporting dates. Stocks are weighted by dollars invested across all hedge funds.
• Short Leg: Short book comprised of names with the highest short interest, point-in-time for the same dates. Stocks are weighted by total notional borrowed.

The L/S book approximates hedge fund longs against their most likely shorts (names with highest short interest in the market).

If we look at this L/S portfolio versus the S&P 500, some valuable insights start to emerge.

Industry Positioning Largely Explains Active Performance

This portfolio outperformed the S&P 500 by over 5% in 2020 with returns largely coming from the portfolio’s active exposures to Industries (8.68%).

Digging in further, we see that active industry bets on Real Estate, Banks, Energy E&P, and Tech Hardware were the top Industry performance drivers.

From the Exposures section, we see that all of these performance gains came from underweights to these industries. We also see that these underweights did not dramatically change over the period, suggesting that hedge funds maintained their industry positioning after the March downturn.

Institutional Investors Were Long Volatility Heading into the Crisis

The two charts below show the active exposure and performance of hedge funds to Wolfe’s Volatility factor (vs the S&P500). We can see that funds were already positioned in higher volatility names going into the COVID downturn (which led to a 3% underperformance), and reaped great rewards from the bear market rally in April, reversing their losses into a 8% positive swing in outperformance.

Summary

Contrary to what we may have thought going into the analysis, institutional investors were well positioned heading into COVID, didn’t stray far from their industry tilts, and took advantage of the April bear market rally.

US & Global Market Summary

‍US Market: 5/26/20 - 5/29/20

• The market saw a strong upward move in a truncated week, despite troubling headlines both near and far, with investors becoming more sanguine as all 50 states continued to open back up to varying degrees.
• U Michigan Consumer Sentiment saw a slight increase in May, landing at 72.3 from April’s 71.8.
• Personal income in the US popped by 10.5 % in April, due to pandemic relief payments to households (government transfer payments were up +89.6% in April).
• At the same time, consumer spending fell 13.6% in April, after dropping by 6.9% in March.
• Major uncertainty revolves around Sino-US relations, with Trump announcing measures against Beijing, including suspension of entry to US universities for certain Chinese nationals.

‍Factor Update: Axioma US Equity Risk Model (AXUS4-MH)

• Value reversed the trend and became the week’s biggest winner, as it climbed a bit higher into Overbought territory.
• Earnings Yield also enjoyed a positive move on a normalized basis, as it headed towards +2 SD above the mean.
• Profitability saw a slight rebound from the depths of Extremely Oversold space. Recall this factor reached a peak of +6.47 SD above the mean on 3/20.
• Size appeared to bottom out at -3.17 SD below the mean on Wednesday, and has since seen a slight move back towards the mean (sitting at -3.09 SD below the mean)
• Volatility peaked at +2.84 SD above the mean and has since softly moved lower to end at +2.69 SD above the mean (Extremely Overbought).
• Market Sensitivity continued to decline from +2.86 SD above the mean on 5/6, on a path to exiting Extremely Overbought territory.
• Growth saw a marked decline as it reverted towards the mean, although remains an Overbought factor.
• US Total Risk (using the Russell 3000 as proxy) saw a slight decline of 16bps.

Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• Exchange Rate Sensitivity once again was the biggest gainer, entering Overbought territory as it continued to surge from a bottom of -4.9 SD below the mean on 3/31.
• Size continued to bounce back from a nadir below -3 SD below the mean, although it remains Extremely Oversold.
• Earnings Yield saw a slight recovery from last week as it headed back towards the mean after bottoming out at -1.42 SD below the mean on 5/25.
• The bleeding was put on hold for the moment in Profitability, which had been the biggest loser for four consecutive weeks. This factor was +3.98 SD above the mean on 4/2.
• Market Sensitivity and Volatility both saw declines as they both coexist in Extremely Overbought territory after the recent risk-on rally.
• Similar to the US, Growth was the biggest loser, as it fell -0.75 SD and shed its Extremely Overbought label.
• Global Risk (using the ACWI as proxy) decreased by 15bps, in line with the US.

Regards,
Omer