"Someone Is Wrong" - Why The Quant War Means Vol Is Set To Soar
An example of just this "war of the robot (traders)", is that as Credit Suisse observes, a "quant war" is quietly taking place, and as Bloomberg eloquently adds, "computer is fighting computer in a hedge fund tilt that could get messy regardless of the winner."
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The problem facing the quant world is learning how to respond to the same signal inputs. For the most part, the responses have not led to a wide divergence, however something appears to have changed this time around: "as the quant population exploded, analysts have spent more time trying to pin down how they will react to volatility and other inputs. And with good reason, as long-short funds are sitting on $215 billion in assets, while CTAs oversee some $330 billion, according to BarclayHedge, a database that tracks hedge fund performance."
The major divergence observed above is troubling to Connors, because it is reminiscent of the periods before the two most recent corrections, when funds took similar opposing bets. Trend-following commodity trading advisers and equity long/short funds are currently 47 percentage points apart in their U.S. equity exposure, the largest spread since just after the S&P 500 Index bottomed in February. Before that, the last time the spread grew to more than 40 percentage points was in August and September of 2015, the worst two-month stretch for the S&P 500 since 2011.
The causes for the variance in quant sentiment have been isolated: CTAs bearishness is being spurred by an event occurring after the election: the Federal Reserve’s December meeting, when rates may rise, Connors said. On the other side, equity long-short managers have been buying neglected companies like banks in anticipation of higher rates, he said due to relative valuation mispricing.