It Took a Few Days for Active Funds to Give Up Half Their Alpha

(Bloomberg) -- For fund managers, a good year has quickly come under threat as their favorite stocks stopped cooperating.

Blame it on equity market gyrations that sent heavily owned industries such as technology, consumer discretionary and banks to the bottom of the leader board. Meanwhile, dividend stocks such as utilities and real estate jumped.

The reversal caught many managers off guard and couldn’t have come at a worse time for funds that are required to report performance to investors as quarter-end approaches. Among the 50 biggest large-cap funds tracked by Wells Fargo, the return generated above the market this year has been cut by about half in a span of days.

It Took a Few Days for Active Funds to Give Up Half Their Alpha

“Someone or someones are really scared,” Chris Harvey, Wells Fargo’s head of equity strategy, wrote in a note to clients. “Earlier this week, we put forth the belief that ‘long onlys’ had an incentive to trim momentum exposure and possibly increase cash or risk aversion assets. Currently, it doesn’t feel like it can happen fast enough.”

As managers sought to lock in profits for the quarter, volatility whipped up. Thursday’s reversal was an example of that, with investors rushing to take advantage of the morning rally to exit positions. Momentum stocks, which have beaten the market in recent months, bore the brunt of selling. The iShares Edge MSCI USA Momentum Factor ETF has dropped 3 percent this week, on course for the worst decline in three months.

“It felt like the start of an unwind,” Harvey said. “Into Friday’s close, we expect ‘sloppy’ market action with demands for liquidity eclipsing liquidity providers.”

©2018 Bloomberg L.P.