Quants Forced to Shed $225 Billion of Short Bets in Big Squeeze
Fast-money quants were effectively forced to buy an estimated $225 billion of stocks and bonds over just two trading sessions, as one of Wall Street’s hottest strategies in the great 2022 bear market shows signs of cracking.
As cooling consumer price data sparked a cross-asset rally, trend-following traders were compelled to unwind short positions totaling about $150 billion in equities and $75 billion in fixed income on Thursday and Friday, JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimated.
Given their notable firepower, Wall Street strategists are now touting the potential for further sharp market gains -- if these systematic managers such as Commodity Trading Advisors find themselves under pressure to hike their exposures anew.
CTAs, which take long and short positions in the futures marketplace, may purchase $28 billion worth of stocks this week if benchmarks close largely unchanged, according to an estimate from Scott Rubner, Goldman Sachs Group Inc.’s managing director. Should bonds stand still, that could lead to $40 billion of purchases over the next week -- and potentially $100 billion in the next month, his model tracking various markets suggests.
The projections signal an ongoing allocation shift among the rules-based cohort, who have netted historic gains by riding the inflation trade earlier this year, with bearish bets against shares and Treasuries combined with bullish exposures to the dollar and commodities.