Robinhood army taking on quants
New research from quant firm Robeco is lending heft to fears that the day-trader billions flooding the stock market spell trouble for some of Wall Street’s smartest minds.
With suspicions growing that amateur investors are disrupting market patterns, a study from the 188 billion euro (US$220 billion) manager suggests retail allocations favouring speculative technologies are in almost direct opposition to traditional systematic trades.
Robeco’s research, limited to indexes from two issuers, found the frenzy for thematic funds — from artificial intelligence to space travel — is bidding up expensive stocks that promise growth in cash flows over the long haul.
The investing approach favoured by the Robinhood-powered cohort is in stark contrast to those systematic players who tend toward cheap equities and profitable companies.
“Investors in thematic indices are effectively trading against quant investors,” David Blitz, chief researcher at Robeco, wrote in the paper.
Opposing the retail masses may not be a bad thing for quants. The money gushing into growth stocks may leave them so overvalued that the reverse bet — the value trade — has a greater capacity to outperform in the long term.
U.S. thematic ETF assets have doubled in a year to more than US$160 billion, according to data compiled by Bloomberg Intelligence. Robeco cited earlier research suggesting such funds often arrive at times of heightened media exposure and bullish sentiment, but tend to perform poorly after launch.
“Thematic indices may be primarily targeting retail investors who are attracted to recent performance and appealing stories, instead of more sophisticated professional investors who are familiar with asset pricing theory,” Blitz wrote.
The researcher cautioned against over-generalizing the results of the study, given it was contained to two index providers. Yet a glance at the biggest thematic products shows that the booming sector is dominated by unprofitable growth companies.
The largest U.S. thematic ETF by far is Cathie Wood’s actively managed Us$21-billion ARK Innovation ETF (ticker ARKK). It’s packed with bets on disruptive tech companies with a patchy profit history at best. The biggest holding is Tesla Inc., which even after a recent slump is trading at more than 100-times its expected earnings for the next 12 months.
Robeco used the thematic indexes of S&P Dow Jones Indices LLC and MSCI Inc., which partners with Wood’s Ark Investment Management for its gauges.
To quants like Blitz, the popularity of thematic strategies is hard to understand since those exposures imply low expected returns in the long run. That may amuse those in the Reddit crowd who delight in confounding Wall Street pros, fixating on rocketship emojis over EBITDA projections.