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Yahoo
5 days ago
- Business
- Yahoo
Why a 'garbage rally' powered by junk stocks could explain quant hedge funds' no good, very bad summer
Quant hedge funds have been losing money since the start of June. The causes are unclear, though execs, traders, and banks have pointed to a few factors. Wednesday was another rough day, as the average quant lost 0.8%, according to Goldman Sachs. As the fundamental investing world marvels at another potential bubble made up of meme stocks and retail traders, quant hedge funds are trying to solve a much more complex problem. The smartest people at the smart money firms have been on a weekslong losing streak starting at the beginning of June, with firms like Qube, Two Sigma, and Point72's Cubist suffering losses over that time. Wednesday was another rough day of trading for many funds as the average quant lost 0.8%, according to Goldman Sachs. The bank's prime brokerage unit said July was on track to be the worst month in five years and pointed to similar factors as it did earlier in the week: A momentum sell-off, crowded trades, and high volatility in certain stocks. Business Insider previously reported that quant firms have been trying to pinpoint the cause of the steady-drip losses that have eroded a hot start to the year in systematic trading. Goldman isn't the only firm that's begun to wrap its head around what's happening. Computer-run managers have come up with theses, found parallels to past markets, and are even planning for a quick rebound. A belief taking hold is that broader market calamity is unlikely to spread, as the sources of pain aren't fundamental market weakness or a lurking economic maelstrom, but rather the opposite: a surprisingly strong economy that has flooded the markets — and questionable stocks — with liquidity that happened to catch quants wrong-footed. Dark Forest Technologies founder Jacob Kline wrote in a Friday note to investors that the current scenario is "not at all like 2007," when forced deleveraging inflicted rapid losses across the systematic space. Kline, who was previously on the investment committee at Bridgewater, said this summer's swoon is a byproduct of "what we politely call a 'garbage rally.'" He theorizes that the resurgence in heavily shorted junk stocks in recent weeks has forced some smaller quant firms to sell their positions, adding to the pain for everyone still holding on. "It's a bad month but not a crisis; the drivers are atypical but not surprising," the note reads. It's not Sydney Sweeney and the memestock crowd Don't give too much credit to Sydney Sweeney and the memestock crowd. They were late to the ball game. One executive at a multimanager fund involved in quant strategies said some large funds started noticing losses before June. Weeks before Kohl's and American Eagle became retail darlings, some micro-cap stocks and thinly traded Chinese names "had been running for three weeks doing silly things." "There's no underlying malady. No COVID. No great financial crisis," the multimanager exec said. He ascribes blame largely to a broader surge in market liquidity and risk appetite, a result of positive macroeconomic developments that began burbling months ago. A "peculiar set of circumstances" preceded the quant bleeding, according to Kline. The broader stock market rally heading into June was largely driven by retail and systematic trend-following. Hedge funds had relatively low net exposure — but they had been hedging the quality stocks by shorting weak ones, which was profitable. The market reached all-time highs in June, and with prices so rich, hedge funds stopped adding to those high-quality stocks but also stopped betting against the weak ones. Removing their short positions boosted "garbage" stocks, which attracted the attention of retail traders and meme stock enthusiasts, driving those positions up further. Because quants, in simplistic terms, use their mathematical firepower to "sort good from bad," as Kline put it, this rally in low-quality companies set many of them up for pain. "Quants are generally going to be on the other side of that kind of arbitrary move," Kline said. Strategies that jump on short-term trends "may be exacerbating" the surge, said Antoine Haddad, founder of $1 billion Bainbridge Partners, a multistrategy hedge fund with quant portfolio managers. This includes "AI-driven algos too," he said. The big-picture driver of this frenzied trading is the strong macroeconomic backdrop — low inflation, muted tariff impact, lack of rate hikes from the Federal Reserve — which has attracted more money into the market. During Covid and the original memestock craze four years ago, the market was awash in liquidity, and money gravitated to odd places, including seemingly worthless stocks — not to mention NFTs, cryptocurrencies, and SPACs. What's happening in 2025 is an echo, similar but far less intense. Another wrinkle and outgrowth of the increasing liquidity and risk appetite is the thaw in equity capital markets, which "have lit up like a Christmas tree," the multimanager exec said. While capital raising was dead much of this year, companies in June began raising money again through initial public offerings, follow-on raises, and convertible bonds, all of which "accelerated towards the end of the quarter, as global issuers and investors gained confidence amid a market rebound," according to Morgan Stanley's mid-July earnings call. This allows companies, "garbage" or otherwise, to improve their prospects by injecting their coffers at attractive valuations, potentially boosting their stock price as well. While many hedge funds closely monitor such activity, it's not traditionally the bailiwick of quants. "Quants don't sit in that business and they don't see that flow," the multimanager exec said. All eyes on the industry's largest quant funds Understanding the source of the quant carnage is one question. Identifying when the pain will abate is equally important. One trader who works at one of the industry's largest quant funds told BI that the actions of the biggest firms will be the most significant factor over the next week. If these funds are forced to sell, then there could be serious pain that could impact everyone from Fidelity mutual funds to Robinhood retail traders. "Some small players don't have a choice but to capitulate," the multimanager exec said, adding that the larger firms know that if a major peer cuts its exposure, "then it becomes a bigger contagion and gets out of hand." This hasn't happened yet, and some are betting that the bigger players will just sit tight. The size of the funds, the pain tolerance of their executives, and the trust they have in their models is where the quant heavyweights have the ability to shine. They either have investor capital locked up for years or a giant horde of internal money — meaning they can withstand losses for longer, especially if they anticipate a bounceback. Dark Forest compared the situation to the end of 2023, when some smaller quants were stung by the Federal Reserve's signalling that lower rates may be coming. This increase of liquidity in the stock market caused a similar surge in stocks that quants were either short or not invested in. Those who "pulled back missed out badly," while funds that held firm saw substantial gains in the following months. "Like 2023, the losses are big enough to where they are inducing the weaker hands to delever, which is exacerbating the losses this week," the note reads. But this time around, the "strong hands" will let their models continue because "the ARKKs of the world are unlikely to keep outperforming the market by 10% a month," Kline said, referring to the innovation-focused ETF managed by Ark Investment Management. "We think strong hands should be levering up into this headwind," the note concluded. Another executive of a small quant fund said they planned to ride out the "froth in sexy sectors." "We are not going to suddenly switch our models over this," he said. "It had been a great year before the summer. Those conditions can come back." The multimanager exec believes the worst is over. It can take time for markets to recalibrate the junk stocks, but "now that everyone is writing about it, we're probably done." Read the original article on Business Insider
Business Insider
5 days ago
- Business
- Business Insider
Why a 'garbage rally' powered by junk stocks could explain quant hedge funds' no good, very bad summer
As the fundamental investing world marvels at another potential bubble made up of meme stocks and retail traders, quant hedge funds are trying to solve a much more complex problem. The smartest people at the smart money firms have been on a weekslong losing streak starting at the beginning of June, with firms like Qube, Two Sigma, and Point72's Cubist suffering losses over that time. Wednesday was another rough day of trading for many funds as the average quant lost 0.8%, according to Goldman Sachs. The bank's prime brokerage unit said July was on track to be the worst month in five years and pointed to similar factors as it did earlier in the week: A momentum sell-off, crowded trades, and high volatility in certain stocks. Business Insider previously reported that quant firms have been trying to pinpoint the cause of the steady-drip losses that have eroded a hot start to the year in systematic trading. Goldman isn't the only firm that's begun to wrap its head around what's happening. Computer-run managers have come up with theses, found parallels to past markets, and are even planning for a quick rebound. A belief taking hold is that broader market calamity is unlikely to spread, as the sources of pain aren't fundamental market weakness or a lurking economic maelstrom, but rather the opposite: a surprisingly strong economy that has flooded the markets — and questionable stocks — with liquidity that happened to catch quants wrong-footed. Dark Forest Technologies, a quant fund run by former Bridgewater researcher Jacob Kline, wrote in a Friday note to investors that the current scenario is "not at all like 2007," when forced deleveraging inflicted rapid losses across the systematic space. He said this summer's swoon is a byproduct of "what we politely call a 'garbage rally.'" He theorizes that the resurgence in heavily shorted junk stocks in recent weeks has forced some smaller quant firms to sell their positions, adding to the pain for everyone still holding on. "It's a bad month but not a crisis; the drivers are atypical but not surprising," the note reads. It's not Sydney Sweeney and the memestock crowd Don't give too much credit to Sydney Sweeney and the memestock crowd. They were late to the ball game. One executive at a multimanager fund involved in quant strategies said some large funds started noticing losses before June. Weeks before Kohl's and American Eagle became retail darlings, some micro-cap stocks and thinly traded Chinese names "had been running for three weeks doing silly things." "There's no underlying malady. No COVID. No great financial crisis," the multimanager exec said. He ascribes blame largely to a broader surge in market liquidity and risk appetite, a result of positive macroeconomic developments that began burbling months ago. A "peculiar set of circumstances" preceded the quant bleeding, according to Kline. The broader stock market rally heading into June was largely driven by retail and systematic trend-following. Hedge funds had relatively low net exposure — but they had been hedging the quality stocks by shorting weak ones, which was profitable. The market reached all-time highs in June, and with prices so rich, hedge funds stopped adding to those high-quality stocks but also stopped betting against the weak ones. Removing their short positions boosted "garbage" stocks, which attracted the attention of retail traders and meme stock enthusiasts, driving those positions up further. Because quants, in simplistic terms, use their mathematical firepower to "sort good from bad," as Kline put it, this rally in low-quality companies set many of them up for pain. "Quants are generally going to be on the other side of that kind of arbitrary move," Kline said. Strategies that jump on short-term trends "may be exacerbating" the surge, said Antoine Haddad, founder of $1 billion Bainbridge Partners, a multistrategy hedge fund with quant portfolio managers. This includes "AI-driven algos too," he said. The big-picture driver of this frenzied trading is the strong macroeconomic backdrop — low inflation, muted tariff impact, lack of rate hikes from the Federal Reserve — which has attracted more money into the market. During Covid and the original memestock craze four years ago, the market was awash in liquidity, and money gravitated to odd places, including seemingly worthless stocks — not to mention NFTs, cryptocurrencies, and SPACs. What's happening in 2025 is an echo, similar but far less intense. Another wrinkle and outgrowth of the increasing liquidity and risk appetite is the thaw in equity capital markets, which "have lit up like a Christmas tree," the multimanager exec said. While capital raising was dead much of this year, companies in June began raising money again through initial public offerings, follow-on raises, and convertible bonds, all of which "accelerated towards the end of the quarter, as global issuers and investors gained confidence amid a market rebound," according to Morgan Stanley's mid-July earnings call. This allows companies, "garbage" or otherwise, to improve their prospects by injecting their coffers at attractive valuations, potentially boosting their stock price as well. While many hedge funds closely monitor such activity, it's not traditionally the bailiwick of quants. "Quants don't sit in that business and they don't see that flow," the multimanager exec said. All eyes on the industry's largest quant funds Understanding the source of the quant carnage is one question. Identifying when the pain will abate is equally important. One trader who works at one of the industry's largest quant funds told BI that the actions of the biggest firms will be the most significant factor over the next week. If these funds are forced to sell, then there could be serious pain that could impact everyone from Fidelity mutual funds to Robinhood retail traders. "Some small players don't have a choice but to capitulate," the multimanager exec said, adding that the larger firms know that if a major peer cuts its exposure, "then it becomes a bigger contagion and gets out of hand." This hasn't happened yet, and some are betting that the bigger players will just sit tight. The size of the funds, the pain tolerance of their executives, and the trust they have in their models is where the quant heavyweights have the ability to shine. They either have investor capital locked up for years or a giant horde of internal money — meaning they can withstand losses for longer, especially if they anticipate a bounceback. Dark Forest compared the situation to the end of 2023, when some smaller quants were stung by the Federal Reserve's signalling that lower rates may be coming. This increase of liquidity in the stock market caused a similar surge in stocks that quants were either short or not invested in. Those who "pulled back missed out badly," while funds that held firm saw substantial gains in the following months. "Like 2023, the losses are big enough to where they are inducing the weaker hands to delever, which is exacerbating the losses this week," the note reads. But this time around, the "strong hands" will let their models continue because "the ARKKs of the world are unlikely to keep outperforming the market by 10% a month," Kline said, referring to the innovation-focused ETF managed by Ark Investment Management. "We think strong hands should be levering up into this headwind," the note concluded. Another executive of a small quant fund said they planned to ride out the "froth in sexy sectors." "We are not going to suddenly switch our models over this," he said. "It had been a great year before the summer. Those conditions can come back." The multimanager exec believes the worst is over. It can take time for markets to recalibrate the junk stocks, but "now that everyone is writing about it, we're probably done."
Yahoo
04-07-2025
- Business
- Yahoo
Quant Hedge Funds Ride Whiplash Markets to First-Half Riches
(Bloomberg) -- From Treasury market reversals to trade threats, the first half of 2025 was dominated by policy upheaval and Wall Street angst. The dollar famously fell, while commodities and risky assets were whipsawed. But inside the markets where the world's biggest quants operate, a funny thing happened: Time-honored trading patterns prevailed. Foreign Buyers Swoop on Cape Town Homes, Pricing Out Locals Massachusetts to Follow NYC in Making Landlords Pay Broker Fees NYC Commutes Resume After Midtown Bus Terminal Crash Chaos Struggling Downtowns Are Looking to Lure New Crowds What Gothenburg Got Out of Congestion Pricing Markets rewarded the strong over the weak, widening the gap between winners and losers amid a return to what AQR Capital Management's Cliff Asness has called 'basic rational investing.' That wide dispersion, as the industry calls it, proved fertile territory for systematic hedge funds, which scored some of the strongest returns so far in 2025. Strong performers included Marshall Wace's TOPS, Renaissance Institutional Equities Fund and AQR Delphi Long-Short Equity, which all climbed about 11%, beating broader hedge-fund performance. Voleon Composition, a machine-learning hedge fund, gained 12.8%, while Two Sigma Spectrum was up 7.6%. 'Some companies are doing better than others again,' said Richard Mathieson, managing director at BlackRock, whose equity market neutral fund is up 8% this year. 'So for that process where you're taking a fresh up-to-date view in every security in the market and building it into a portfolio, the opportunity set is just a lot more compelling.' Systematic stock strategies managed to thrive against a backdrop of rapid-fire market shocks from January through June, a stretch that saw the S&P 500 stage its biggest reversal since 2009 and commodity volatility surge to the highest in three years at one point. Treasuries lurched from their longest winning streak since 2016 in February, before succumbing to the worst weekly drop in 24 years just a little more than a month later. These quants made money not by avoiding the upheavals, but by riding a market where stocks started moving more independently. The question now is whether that investing edge will hold, as calmer markets and resilient economic data — with Thursday's jobs report landing stronger than expected — push the S&P 500 to fresh all-time highs. All told, 2025 is extending a renaissance for computer-driven stock traders, following the so-called quant winter — the years leading up to the pandemic when few strategies paid off beyond buy-and-hold bets on Big Tech. While their trades can vary, quants typically spread their bets more widely, and slice and dice stocks based on some quantifiable characteristics and historical patterns. That means they're more likely to win in a year like this, with less concentration in mega-caps and different shares dancing to their own beat. For another lens into that, a strategy that bets on US single stocks being more volatile than the overall index has gained 3.5% this year, according to a Premialab index aggregating bank swap products. In terms of commonly used factors — or quant characteristics often used to sort portfolios — momentum, which simply bets on recent winners, was up for a seventh straight quarter, according to a Bloomberg index. That's a sign that for all the market drama, the internal patterns within stocks have been far less fickle. There are some signs that this might be starting to crack, with momentum dropping the most since March this week as investors rotated into laggards. Fading fears of an escalating trade war have revived investor appetite for risk in the past month, fueling a rotation out of so-called quality and low-risk stocks. 'There are fundamental shocks that are affecting individual securities in different ways,' said Andrea Frazzini, head of global stock selection at AQR. 'Combined with the higher volatility and dispersion we've seen, it really means that we can take more risk, we can get closer to our model and we have an easier time to implement our views.' In stark contrast were quant trend followers that need sustained momentum to profit. The cohort, which trades futures across assets, saw their worst half-year performance since 2000, dropping 10.1% so far in 2025, a Societe Generale index shows. The Systematica Bluetrend Fund slid 17% and Man AHL Alpha fell about 7.6%, while Transtrend lost 17.5%. (The fund was impacted by positions in less mainstream markets, such as within commodities and currencies, executive director Andre Honig wrote in an email.) The rotation out of US stocks — which saw shares outside the nation return about three times the S&P 500 — was also reflected in quant performance. Unlike in previous years, AQR's equity models have been scoring stronger returns outside the US, Frazzini added. The firm's Adaptive Equity strategy rose 15.5% in the first-half, while its Delphi trade, which favors lower-risk companies, benefited from the flight to quality earlier. At Man Numeric, Man Group's quant equity unit, Jayendran Rajamony says other than strength in factors like momentum, it can be hard to generalize performance thanks to the growing use of idiosyncratic signals at each fund. The Man Numeric Quantitative Alpha fund was up 18.7% in the first-half. Even with their computer-driven precision, quant programs may still need occasional human intervention, especially when policy shocks, like tariffs, fall outside the bounds of historic patterns. 'One can argue that some very bold new policy thinking simply cannot be captured,' Rajamony said. 'Intervention as a form of managing risk I think is needed to make sure these portfolios navigate an environment like this.' Representatives for Marshall Wace, Renaissance Technologies, Voleon, Two Sigma and Systematica declined to comment. --With assistance from Lu Wang. (Updates table with additional funds. Previous version corrected the full name of Voleon's fund in third paragraph and table.) SNAP Cuts in Big Tax Bill Will Hit a Lot of Trump Voters Too America's Top Consumer-Sentiment Economist Is Worried For Brazil's Criminals, Coffee Beans Are the Target How to Steal a House Sperm Freezing Is a New Hot Market for Startups ©2025 Bloomberg L.P.
Yahoo
21-05-2025
- Business
- Yahoo
Hamilton Insurance Group, Ltd. (HG): A Bull Case Theory
We came across a bullish thesis on Hamilton Insurance Group, Ltd. (HG) on Substack by Karst Research. In this article, we will summarize the bulls' thesis on HG. Hamilton Insurance Group, Ltd. (HG)'s share was trading at $21.26 as of May 20th. HG's trailing P/E was 6.95 according to Yahoo Finance. A financial analyst presenting a chart of insurance solutions to a boardroom. Hamilton Insurance Group, Ltd., a Bermuda-based specialty insurer, represents a compelling and underappreciated opportunity in global insurance markets. Operating through its International and Bermuda platforms under the Hamilton Global Specialty, Hamilton Select, and Hamilton Re brands, the company underwrites complex risks across casualty, specialty, and property lines. Its U.S.-focused Hamilton Select targets the fast-growing excess and surplus (E&S) market, while Hamilton Re provides global reinsurance solutions. This diversified structure provides both earnings balance and strategic flexibility. Under the leadership of seasoned executives from Kinsale, Tokio Marine Kiln, and Chubb, Hamilton has executed a disciplined turnaround, emphasizing pricing rigor and portfolio optimization. This has led to a significant swing in profitability—from underwriting losses in 2022 to $149.4 million in underwriting income in 2024, with premiums written rising to $1.92 billion. The company's strengthening fundamentals are further supported by growing Lloyd's syndicate 4000 capacity, set to rise to GBP635 million in 2025, enabling meaningful international scale. Hamilton's capital strength is equally notable, with a $4.9 billion investment portfolio emphasizing liquidity and quality, including nearly $1 billion in cash and a sophisticated $940 million allocation to a custom Two Sigma 'fund-of-one.' With only $150 million in term debt and an opportunistic $137.6 million share buyback reducing the share count below pre-IPO levels, Hamilton is optimizing capital deployment to enhance shareholder value. The stock is still overlooked, but the convergence of improving underwriting, strong capital allocation, and structural growth sets up a favorable risk/reward profile for investors, with long-term upside potential as the business continues to scale. Also, check out Skyward (SKWD), a quality insurer focused on niche markets. Hamilton Insurance Group, Ltd. (HG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held HG at the end of the fourth quarter which was 18 in the previous quarter. While we acknowledge the risk and potential of HG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock. Disclosure: None. This article was originally published at Insider Monkey.
Yahoo
21-05-2025
- Business
- Yahoo
Hamilton Insurance Group, Ltd. (HG): A Bull Case Theory
We came across a bullish thesis on Hamilton Insurance Group, Ltd. (HG) on Substack by Karst Research. In this article, we will summarize the bulls' thesis on HG. Hamilton Insurance Group, Ltd. (HG)'s share was trading at $21.26 as of May 20th. HG's trailing P/E was 6.95 according to Yahoo Finance. A financial analyst presenting a chart of insurance solutions to a boardroom. Hamilton Insurance Group, Ltd., a Bermuda-based specialty insurer, represents a compelling and underappreciated opportunity in global insurance markets. Operating through its International and Bermuda platforms under the Hamilton Global Specialty, Hamilton Select, and Hamilton Re brands, the company underwrites complex risks across casualty, specialty, and property lines. Its U.S.-focused Hamilton Select targets the fast-growing excess and surplus (E&S) market, while Hamilton Re provides global reinsurance solutions. This diversified structure provides both earnings balance and strategic flexibility. Under the leadership of seasoned executives from Kinsale, Tokio Marine Kiln, and Chubb, Hamilton has executed a disciplined turnaround, emphasizing pricing rigor and portfolio optimization. This has led to a significant swing in profitability—from underwriting losses in 2022 to $149.4 million in underwriting income in 2024, with premiums written rising to $1.92 billion. The company's strengthening fundamentals are further supported by growing Lloyd's syndicate 4000 capacity, set to rise to GBP635 million in 2025, enabling meaningful international scale. Hamilton's capital strength is equally notable, with a $4.9 billion investment portfolio emphasizing liquidity and quality, including nearly $1 billion in cash and a sophisticated $940 million allocation to a custom Two Sigma 'fund-of-one.' With only $150 million in term debt and an opportunistic $137.6 million share buyback reducing the share count below pre-IPO levels, Hamilton is optimizing capital deployment to enhance shareholder value. The stock is still overlooked, but the convergence of improving underwriting, strong capital allocation, and structural growth sets up a favorable risk/reward profile for investors, with long-term upside potential as the business continues to scale. Also, check out Skyward (SKWD), a quality insurer focused on niche markets. Hamilton Insurance Group, Ltd. (HG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 22 hedge fund portfolios held HG at the end of the fourth quarter which was 18 in the previous quarter. While we acknowledge the risk and potential of HG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock. READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock. Disclosure: None. This article was originally published at Insider Monkey.
