An interesting piece in the Wall Street Journal, which is gated but here is the link if you can access it.
In summary:
- The market’s steady rise has puzzled analysts and portfolio managers as the S&P 500 has churned more than 9% higher this year (and the technology-focused Nasdaq Composite has risen 24%).
- One explanation: Quant funds, or those relying on computer models and automated trading, have been doubling down on equity markets as other investors have stepped back, citing high valuations and concerns about the likely course of the U.S. economy.
- Quant-fund buying has pushed these funds’ net exposure to U.S. stocks to the highest level since December 2021, according to data from Deutsche Bank.
The article illustrates with this via Deutsche Bank:
A risk of such concentrated buying:
- “If you do have concentrated positioning, it does create the risk of unwinds in the case of a negative shock,” said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs. “And the risk you face with them is not just that they might have bought some equities because volatility has gone down—they might have levered up.”
