Malt Liquidity 20
Markets now come freshly squeezed
Active ETFs are just tradeable hedge funds
Yesterday I wrote about the variability in liquidity between various ARK ETFs and the stocks they hold. Today, however, we get some more interesting news:
News on Wednesday that Ark Investment Management has filed to launch the ARK Space Exploration ETF (ticker ARKX) sparked a rally for similar funds as well as for companies linked to everything from intergalactic travel to out-of-this-world broadband.
The Procure Space exchange-traded fund (UFO) jumped 4.9% by 10:15 a.m. in New York on Thursday, the most on a closing basis since May. The SPDR S&P Kensho Final Frontiers ETF (ROKT) added 2.8%, and shares in Richard Branson-founded Virgin Galactic Holdings Inc. soared 19%.
At first glance, you might think this is another “use Signal” case, but I actually think this makes a lot more sense than one would think. I have consistently wondered why demand for an ETF and related derivatives is so high when holdings have to be publicly disclosed each day, along with the NAV of the fund. You could just buy the underlying stocks that you want in the proportions you want and have roughly the same exposure without paying the management fees. But this has a corollary - since all the inflows and outflows are public knowledge, and you have a general idea of what the allocation will be, you can trade ahead of the big trades. A hedge fund doesn’t have to disclose a position until well after it takes it or it is such a significant percentage of the company that they couldn’t possibly just announce it then liquidate - an ETF, on the other hand, has a defined strategy and prospectus - in this case, “space investments” - so you know generally what they’re buying and in correlated proportions with their disclosure. Thus, if you are predicting inflows to the ETF (which, given the number of articles on ARK, seems inevitable to touch a few billion), and if you are interested in the same sector, isn’t it an extremely good idea to try and get in before ARKX goes and makes the purchases you want to anyway (and then charges you a management fee for it)? I particularly love how the ‘hedged’ version of this trade was simply… buying other ETFs in the same space (heh). I mentioned a couple days ago how, if you wanted to be a hedge fund manager but struggled to demand fees, you could just pitch an active ETF instead - however, to take public money, you also are exposed to short pressure and information disclosure that a hedge fund would never have to deal with. It logically follows that if you don’t have proprietary edge to protect, it makes more sense to market as an ETF, where there is more demand for your product, your disclosures hurt your returns less, and you trade the upside for flat AUM-based fees…
The greatest trader ever hangs it up
If you ask a normal person on the street who the “greatest trader ever” is, there is a high probability they’d say Warren Buffett (never mind that he isn’t a trader). If you asked a normal finance major who the “greatest trader ever” is, they might say Ray Dalio, a man who wrote a book on living a harmonious, principled life who got fired from his first (and only) job working for someone else by punching his boss in the face. For anyone who has followed trading from a quantitative standpoint, Jim Simons towers above the rest, and today, he’s hanging up the gloves:
Investing pioneer James Simons is stepping back from his quant hedge fund, Renaissance Technologies LLC.
Today, Mr. Simons is considered the most successful money maker in the history of modern finance. Since 1988, his flagship Medallion hedge fund generated average annual returns of 66% before charging hefty investor fees through 2018. After fees, the fund had an annual return of 39%.
The fund has also beaten the market over the past two years. Over the history of the fund, it has racked up trading gains of more than $110 billion. Mr. Simons’s performance is better than investing luminaries including Warren Buffett, George Soros, Peter Lynch… and Ray Dalio.
It is not a stretch to say that most math-oriented market nuts harbor a secret fantasy to replicate what Simons did - the true capture of signal, with none of the noise, and returns being solely variable on the presence of market volatility and variables beyond any control - in essence, ‘solving’ the market. I don’t have much more to say, but here’s a couple good reads on Medallion fund and Jim Simons.
Retail turns GME into a game
While the greatest short squeeze of all time is undoubtedly the one that drove TSLA to SpaceX-rocket-tier heights, perhaps the most fascinating short squeeze is GME:
Investors who bet that shares of GameStop Corp. would fall shifted positions Wednesday, sending the struggling videogame retailer’s stock soaring to its highest levels in years.
GameStop shares were up more than 57% to $31.40 on Wednesday, marking a steep climb from a year earlier, when the stock was valued at just $4.61 a share.
Many traders believed GameStop’s shares were set to decline. As of the end of last year, short interest in the stock—expressed as a percentage of GameStop shares available for trading—exceeded 138%, making it the second-most shorted company by that metric with a market value of at least $1 billion, according to data from FactSet.
The fascinating part is not the short squeeze itself, but that it appears to be entirely retail driven. I have written before how “if everyone trading a stock disregards the ‘signal’ part entirely, the noise and pure price action really is the signal”, but what seems to be happening here is coordinated retail demand to blow out the short sellers:
I have truly never seen anything like this. Pump-and-dump and every form of retail manipulation has existed long before the internet (you're supposed to push Webistix) but, to re-emphasize, coordinated retail demand targeting shorts and actually pulling it off is something else entirely. When you have a battalion of spread-insensitive traders, each time someone crosses the spread, the price gets pushed higher and the naked short seller hurts that much more and creeps closer to flattening their position or getting margin called. Part of me wonders if it’s possible to start buying up stocks with high short interest between $700mm and $1.4 billion market cap in anticipation of these “soldiers” turning to them next. No, it can’t be possible to make a return doing this. Unless…?
On that note…