RBC: "Energy, Stat Arb And Value Teams Are Getting Blown Out"
Well, things began going south around the Fed hike in mid Dec, which marked the top of nearly all thematic ‘value market neutral’ / ‘cyclicals vs defensive pairs’ trades, largely in conjunction with the USD ‘peak.’ And of course, 2017 YTD, both ‘value’ market neutral and the US ‘energy’ sector have been an outright sale as ‘reflation’ themes have bled-out with Trump’s fiscal policy failures / inability to push rates and inflation expectations higher. As you can see clearly below, energy (XLE) has tracked ‘value market neutral’ (12m) to perfection:
It should then be noted too that $ flows into ‘value market neutral’ smart-beta ETFs began to reverse after peaking in start January ’17, and for the month of April, have actually seen OUTFLOWS in ‘value’ smart beta for the first time since February ’16, as investors throw in the towel on ‘reflation’:
More recently, popular QoQ ‘mean-reversion’ stat arb strategies have been gutted (see my ‘mean-reversion’ proxy below, -4.0% QTD after starting April +1.3% at one point). This is relevant to the ‘energy’ sector as it was the worst performing sector in Q1 and thus would have been part of the ‘long leg’ in any such mean-reversion strategy:
Long story short, I think there is now enough of a fact-pattern established here to connect the major strains in ‘value market neutral’ strategies (-5.8% YTD, worst performing factor strategy in Dow Jones M/N index universe), mean-reversion stat-arb strategies (proxy -4.0% QTD) and energy sector market neutral book ‘blow-ups,’ with speculation of multiple teams shut around the Street since April.