It’s hard to disentangle the many forces driving pandemic trading amid record stimulus, but academic studies have chronicled the growing influence of retail investors in the broader stock market. One suggests herding by the users of trading apps leads to massive returns on the day that subsequently fizzle out. Another paper shows message-board chatter drives retail activity, fuels higher gains and deters shorting—all in the short-term.
While quants ordinarily seek to exploit behavioral quirks and stock volatility, identifying retail flows in the first place in order to figure out price patterns is a hard task, with brokers among the few directly in the know.
Man Group’s hedge-fund advisory unit in its third-quarter outlook recommended cutting exposure to equity quants tied to a narrow set of strategies, such as those that rely on weird price moves reverting back to normal—thanks to the random and volatile nature of retail buying and selling.
“Based on historical patterns a quantitative strategy might assume these stock price moves are a deviation from a fundamentally justifiable value,” said Man FRM’s chief investment officer Jens Foehrenbach. “But if the retail flows then keep pushing the price in the same direction, the strategy likely takes losses on this trade.”
That quants are adjusting to meme-stock traders underscores the contingent’s newfound power. Systematic investors tend to run portfolios with a huge array of securities and long-standing risk controls that should shield them from big swings in a handful of stocks. By contrast, discretionary fund managers run a greater risk of having one large exposure roiled by the r/WallStreetBets army.
Now, both alpha-chasing quants and human stock pickers are driving a boom in alternative data sets scraping Reddit or Twitter for early signs on the next retail favorite like Sundial Growers Inc. or Advanced Micro Devices Inc. In a survey with 100 hedge-fund managers overseeing $231 billion conducted by SIGTech, nearly three-quarters said they’ve increased use of data from social media and chat rooms over the past year.
Campbell & Company’s Managing Director of Quant Equities Brian Meloon is among systematic players now incorporating signals on trading activity including likely retail flows to guide a stock-picking model run by the $2 billion quant hedge fund.
Similarly, UBS’s quantitative-investment strategies team recently revamped a stock-momentum product in order to incorporate flows from the bank’s retail market-making desk. The idea is, instead of just chasing the best-performing equities, the UBS offering also tracks the market-moving prowess of the day-trader cohort.
Still, it’s early days yet, with quants only just beginning to grapple with the staying power of the Robinhood crowd.
“Themes such as ‘meme’ stocks and social media have introduced more short-term volatility in certain stock clusters,” said Spyros Mesomeris, head of QIS structuring at UBS. “This reflects the increasing influence and participation of the retail sector in equity markets.”
This article was provided by Bloomberg News.