"Too Slow, Too Reluctant" - JPM Finds Most Investors Missed The "Trump Trade"

That the stock market move surprised traders in the aftermath of the just as surprising Trump election victory has been extensively described both here and elsewhere: the dramatic surge in the S&P to new all time highs, pushing the index above 2,200 last week for the first time ever on hopes of a $1 trillion fiscal stimulus has been duly noted. However, perhaps just as surprising is that as JPM finds, very few investor types managed to successfully profit from the so-called Trump trade.

As Nikolaos Panigirtzoglou writes in his latest weekly Flows and Liquidity report, the market moves since the US elections have been both big and surprising. The so called Trump trade, which has five main manifestations ā€“ short duration, long US equities, long the dollar, short EM, overweight Banks and Cyclicals vs Defensives ā€“ appears to have been "successfully captured by only few types of investors." In JPM's conversations with clients, the majority "have been either too slow or too reluctant to jump into the Trump trade post November 8th."

It adds that within hedge funds the only categories that appear to have captured the Trump trade successfully were Currency and Equity Long/Short funds. Macro hedge funds, CTAs and Risk Parity funds, all produced disappointing performance.

Why? "Their reluctance stems from a general belief that markets are getting ahead of themselves and from a general dismissal of the idea that Trump represents a game changer for markets."

Ironically, for years the markets were climbing a wall of worry leaving most hedge funds - who were understandably hedging the downside - underperforming the S&P500; now that they finally got a "wall of optimism", they have again decided to shy away from it.

Here are the details:

  • An examination of the performance of various investor types since the election, at least the ones that report their performance on a daily basis, confirms that only a few managed to benefit from the big market moves since Trump was elected. This can be seen in Figure 1.

  • Risk Parity funds had the worst performance losing 2.0% since the election followed by Discretionary Macro which lost 1% (both returns are to Nov 21st). Risk Parityfunds were hurt as their equity gains were not enough to offset the sharp selloff in bonds on which Risk Parity funds are typically exposed by four times as much as equities. Discretionary Macro managers appear to have been wronglyĀ  positioned into the US election posting a cumulative loss of 1%. CTAs were flat, outperforming their Discretionary Macro counterparts but nevertheless missing the Trump trade.
  • Their real money counterparts, i.e. multi asset or balanced mutual fund managers, outperformed Macro hedge funds returning 0.8 % since the US election. This compares to a return of 1% for a 60%Ā  S&P500/40% US Agg portfolio, a typical benchmark for these balanced mutual fund managers. In other words, these balanced mutual fund managers have underperformed their benchmark, but only slightly.
  • Equity Long/Short hedge funds did better, returning 1.7% since the election, most likely benefitting from the sectoral shifts towards Banks and Cyclical stocks. Their effective equity beta to the S&P500 index since the US election has been around 0.5 which is at the upper end of its historical range, suggesting that Equity Long/Short hedge funds have been rather successful in capturing the Trump trade post the US election.
  • Similarly currency hedge funds did even better returning 2.4% since the election, implying an unusually high 0.8 beta to the US dollar index. This suggests that among the various types of investors examined above, Currency hedge funds have been the most successful in capturing the Trump trade post the US election.
  • Outside Currency and Equity Long/Short hedge funds, the overall disappointing performance of hedge funds was not only the result of them (e.g. Risk Parity funds and Discretionary Macro) not having the right exposures into the US election, but also of their failure to embrace the Trump trade after the election e.g. their failure to increase their equity or dollar betas after the election or to decrease their bond betas.
  • This is consistent with the changes in spec positions seen after the US election. Figure 2 shows the change in net spec positions between Nov 8th and Nov 15th for US equities, US rates ex Eurodollar contracts, the dollar and three EM currencies. This figure shows either a small change or a change towards fading rather than embracing the Trump trade (i.e. a reduction in the short position on US rates and a reduction in the long position on US equities). Again, this is another manifestation of the reluctance by investors to jump into the Trump trade after the election.
  • The reduction in the short position on US rates post the US election is also reflected in our Client Survey, where the percentage of hedge funds adopting long duration positions went up from 0% on Nov 7th to 10% on Nov 21st while the portion of those adopting short duration positions was unchanged (Figure 3).

  • In contrast a greater percentage of real money clients went short duration post the election according to the same survey. In other words our US Client Survey shows that real money investors have beenĀ  better than hedge funds in embracing the Trump post the US election.
  • This is certainly consistent with Figure 1 which shows better performance by multi asset mutual fund managers vs. macro hedge funds. But it is also consistent with the distribution of returns by active mutual fund managers. Among the 100 biggest US active equity funds, 65% exceeded the 3.4% return for the S&P500 index since the US election. Among the 100 biggest US active bond funds 74% exceeded the -2.5% return for the Barclays US Agg bond index since the US election.
  • In other words, different to balanced mutual fund managers, active equity or bond managers (which in terms of AUM are four times as big as balanced funds) have managed to outperform their benchmarksĀ  after the US election.

JPM's summary:

"in all, we find that real money managers have done a better job than hedge funds in embracing the Trump trade and thus benefiting from the big market moves since the election. Within hedge funds the only categories that appear to have captured the Trump trade successfully were Currency and Equity Long/Short funds. Macro hedge funds, CTAs and Risk Parity funds, all produced disappointing performance."

Which likely means that the year end period will be yet another scramble for performance in a FOMO setting as bonus checks are getting prepared; and if recent historical performance is any indication, this scramble by the active manager community to rush into risk will come just as risk assets pull back from all time highs as robots, ETFs and other "passives" unwind to scrambling puny humans, leading to even more disappointment for active investors and their LPs, and even more redemption requests following the month of October, which as we pointed out last week was the worst month for hedge funds in 2016.

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