Today’s alpha is tomorrow’s beta.
That’s a line I read in a Bloomberg story (subscription required) about hedge fund Schonfeld, whose 38-year-old CEO Ryan Tolkin is reported to have said it.
Schonfeld is a multi-strategy hedge fund with about $14 billion of assets. It’s always been quantitative but ran into trouble in 2023 after growing rapidly and shifting from a family office for founder Steven Schonfeld to managing outside money.
Tolkin is credited with righting the ship.
About 25% of its returns are fundamental. It’s a way for public companies to think about what drives the stock market.
For Schonfeld, teams using fundamentals are behind a fourth of returns while those running global macro and fixed income, quantitative strategies and tactical trading drive 75% of returns. I’ve observed before that we learned from large multi-strategy hedge funds that two-thirds of returns come from short-term bets at earnings.
You can see it. The Trade Desk lost 39% Friday. On Jan 6, 2023, TTD was at $42.29. By December 6, 2024, it was over $139. It routinely appeared in the EDGE momentum portfolio for spending lots of time at 10.0.
How did TTD lose a third of its value in a day? Ask AI and the answer is “a reassessment of its growth potential.”
Probably true. But you don’t make money as investors losing a third of your investment because something isn’t growing as fast as you had expected. No, this decline would be a SHORT bet. Right?
Quantitative funds ALREADY KNEW growth trends for TTD by consuming the data. And is it really that hard? We know AI has wrecked the digital advertising market where TTD has been a dominant player.
Today’s alpha is tomorrow’s beta. And TTD had still been delivering it. On June 30, Demand (an algorithm metering buying and selling on a ten-point scale) in TTD rose over 5.0. It hit 10.0 by Jul 10 and stayed there till Aug 1, delivering a 20% return.
That’s momentum. But on Aug 2, Demand fell to 9.0, the first decline in weeks. That’s a hedge-fund tell.
And at July options-resets, short volume topped 69%. That is, nearly 70% of the volume in TTD was short, meaning it wasn’t coming from investors but from short-term traders, and hedges ahead of earnings were short.
There it is, the short bet.
Public companies and investors, these conditions are measurable ahead of earnings. If we can do it, so can hedge funds (like Schonfeld).
And this wasn’t the first rodeo for TTD. On Feb 12, TTD closed at $122.23. On Feb 13, it closed down 33% at $81.92. That same day, CROX shot up 24%. On Aug 7, CROX plunged 29%.
That’s not investment. It’s quantitatively informed tactical trading, with leverage. It’s everywhere. It pervades the stock market, especially at earnings.
Contributing to these giant moves are our practices in the investor-relations profession, folks. We report results like what matters is the Sellside’s view. Often, results are out after the market closes, leaving hours of wild-west, machine-driven trading around the globe to run amok while we twiddle thumbs, sleep, wait to chat with the shrinking sellside.
It’s very easy to trade outside market hours. Machines aren’t waiting for upgrades or downgrades. The sellside downgraded TTD after earnings were out. Well, how is that helpful?
Let’s suppose that the quantitative data derived from scraping the web for digital-advertising data suggests growth is going to be 40% below expectations.
Hedge funds go to Goldman Sachs or whomever and place an eight-times-levered short bet, which manifests in a spike in short volume when GS transfers that risk to the marketplace.
TTD reports earnings and long-onlys pause to consume the data. And all the quantitative bets hit precisely at that moment.
Kaboom!
Today’s alpha vanishes.
It’s better to be tomorrow’s beta. Beta is the performance of the stock market, the general movement of the ocean. That’s what the Vanguard Total Stock Market Index fund buys, and it charges investors three basis points for it. It’s got $2 trillion of assets.
ETFs have added more than $2 trillion in the last twelve months. There are 3,999 ETFs trading in the US stock market, over 2,000 of which are in some way or another after US equity-market beta. Not alpha.
When TTD got clocked in February, it booted itself from beta too. The basket – the sample of stocks reflecting the movement of the market – has one intolerance: Volatility.
It’s volatility-intolerant.
TTD never made it back to its February high in the intervening time despite momentum. When you’re out of the basket, you’re no longer where the money is.
CROX was lower Aug 6 than it was Feb 13 when it jumped 24%. Even big gains are intolerant to Passives, because they cause funds to skew from the benchmark. Beta.
I’m going to talk about this tomorrow at the NIRI SWRC conference and why our IR goal should be beta. Not alpha. It’s sustainable.
And both investors and public companies today need to understand that the great bulk of returns are not driven by fundamentals. Good or bad, it’s true. And the market then is not a barometer for financial performance or conditions.
Buyer beware.
PS – We help companies and investors navigate this market. Ask us and we’ll explain.
