Freeport-McMoRan Inc., whose 71 percent drop in 2015 made it the third worst stock in the S&P 500, is now the second most heavily weighted company in Evercore ISI’s momentum basket. Another newly minted raw-material momentum name, Newmont Mining Corp., has rallied 95 percent since the start of the year. With gains of more than 75 percent, energy companies Oneok Inc. and Range Resources Corp. also became new entrants. That comes just after Oneok posted its worst year since at least 1980.
While it may be less than quants’, hedge funds still have an above-average exposure to equities, according to Marko Kolanovic, head of global quantitative and derivatives strategy at JPMorgan Chase & Co. Meanwhile, computer-driven funds such as volatility targeting portfolios and risk parity strategies have been increasing their exposure for another reason -- the S&P 500’s low volatility.
“While hedge funds do have room to increase equity exposure, they are by no means under-invested,” Kolanovic wrote in a note to clients Tuesday.
Hedge funds have also been clinging to their shorts in the energy industry, said Connors. When they initially covered as a way to manage risk, it created a cycle of quants buying and shorts covering that added fuel to the rally in commodity shares.
“The sharp price movement higher forced short covering by hedge funds,” said Connors. “For the quant guys, this action only validated momentum signals.”