Trend-Following Quants Are ‘Mammoth’ Stock Buyers, Nomura Says

(Bloomberg) -- Trend-following funds have been at the forefront of the stock rally and are likely to drive further gains.

So-called quant funds know as commodity trading advisers (CTAs) have been covering their short positions since early March, pumping $380 billion into global equities, according to Charlie McElligott, cross-asset strategist at Nomura Securities. Still, there’s more short covering to be completed, creating room for the stock market momentum to run.

“CTA Trend buying has been a mammoth source of ‘buy to cover’ flows in global equities,” McElligott wrote to clients Thursday. “Yet there is still more fuel for the fire.”

The S&P 500 Index has surged more than 35% since a low in mid-March amid efforts to reopen economies shut by the coronavirus pandemic and massive doses of monetary and fiscal stimulus. It’s still 10% below a record reached in mid-February.

McElligott’s model for tracking the quant funds signaled a flip in their strategies from 50% short to 100% long yesterday for S&P 500 futures, potentially triggering $17 billion in purchases. The benchmark cash gauge went on to gain 1.5% and closed above 3,000 and its 200-day moving average for the first time since early March.

CTAs are still wagering against small caps, though, at 50% short. They may flip to buying if the Russell 2000 climbs about 6% to 1,522.71, according to McElligott.

“Some remarkable things occurring over the past few sessions -- particularly within the U.S. equities space, as it pertains to consensus positioning and what looks to be a tectonic ‘de-grossing’ of short books and overall dynamic hedges,” he wrote.

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