Before things went south, Bastian Bolesta made easy money from a quant strategy that worked for years thanks to the rise of automated stock traders on Wall Street.
If S&P 500 futures rise, his trading program goes long. If the index drops, it duly puts on a short. Then the money manager just waits for the 4 p.m. bell and closes the position. And repeat.
Known as intraday trend-following, systematic players like Bolesta have long exploited one-way trading patterns in the world’s most-watched stock index.
But in 2020, the strategy posted the worst decline in two decades—seemingly out of nowhere. With no sign yet of a spirited revival, quants are trying figure out what’s causing this once reliable options-powered trade to misfire.
“We still saw some large moves intraday, but they were choppy,” said Bolesta, chief executive officer at Switzerland-based Deep Field Capital with $105 million.
The strategy has been faring better in Asian and European benchmarks, he said. But something weird is happening in the underbelly of the S&P, where the likes of exchange-traded funds and index funds trade billion of dollars in stocks on autopilot in the dying minutes of each day.
It takes advantage of the well-known smile, or smirk, pattern in stock volumes, which tend to surge after the open and even more right before the close. More recently the retail investing frenzy has shifted the activity, with day traders more likely to jump in during the first half of the day.
The intraday strategy’s gained new fans outside a niche band of quants as investment banks including Societe Generale SA package momentum-chasing products for institutions.
All Night Long
Yet a Deutsche Bank AG index tracking the trade has declined 11% from its April peak—an unprecedented slump. Similar indexes from Credit Suisse Group AG, Macquarie Bank and Morgan Stanley tell the same story.
“The bleed seems to be significantly higher than it has been historically,” said Sorin Ionescu, a quant at Deutsche Bank, referring to losses for the strategy.
One theory holds that the release of big news, like global economic data or earnings reports, outside regular hours meant that most of the benchmark’s 16% gain last year came in after-hours trading. All that then reduced the potential for trend followers to eke out gains during the cash session.