In a world where the central bank liquidity tsunami has effectively relegated the whole concept of “alpha” to the dustbin of market history (how do you consistently outperform a benchmark that not only never falls, but in fact rises inexorably irrespective of fundamentals and/or negative macro catalysts), the only option becomes a “strategy” that isn’t really a “strategy.”
Basically, “if you can’t beat ’em, join ’em” – only with leverage if you want to outperform.
The proliferation of ETFs has exacerbated the alpha scarcity problem by funneling money indiscriminately into the largest names, thereby creating a self-feeding loop or, as Howard Marks puts it, “a perpetual motion machine.” Recall the following from an epic letter penned earlier this year by Arik Ahitov and Dennis Bryan, who run the $789 million FPA Capital Fund:
The consequence of unrelenting inflows into passive funds is that stocks that are included in a major index receive ongoing support by the indiscriminate purchases made by these funds regardless of a company’s fundamentals. The benefits are amplified for companies that are owned by dozens of ETFs and index funds.
Ok, so without diving back down that rabbit hole, suffice to say for our purposes here that’s it’s interesting to watch how ETFs are being used by market participants, notably those market participants whose model has been disrupted by the combination of low-cost, passive vehicles and markets that, thanks to central banks, only go up.
So here’s Deutsche Bank with some interesting color on QQQ…
Hedge Fund ownership of ETFs increased in Q2 as shown in the 13F filings from August 15th. Specifically, we look at Hedge Fund usage of QQQ and the SPDR Sector ETFs.
QQQ: Managers increased ETF beta but decreased stock ownership. Hedge Fund ownership is at a record high of 4.1% of AUM or $2bn. Managers increased their ownership of the ETF from 1.4% of AUM ($667mn) at the end of Q1. Shares outstanding for the ETF are flat from end of Q1 to end of Q2.
Ownership of the underlying portfolio decreased over Q2 from 4.1% to 3.7% of float with managers pulling -$5.6bn from the top 10 stocks over Q2.
So they actually pulled more from the individual stocks than they poured into the ETF, even as exposure to the latter is at a record high.
Meanwhile, Deutsche goes on to note that “short interest in QQQ is near a 5Y high at 18.7% of AUM or -$10bn as of August 31st [as] managers significantly increased their ETF shorts by 85% since the end of Q1, when short interest was 11.3% of float or -$5.4bn.”
Go figure (and we mean that figuratively and literally).
