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We have written at length about the tailwind that falling rate volatility provides for our relative value, bottom-up strategies, and we are seeing this manifest through greater stock dispersion in Europe being explained by micro factors rather than by macro factors. Morgan Stanley produced the following charts, Figure 1 and Figure 2. Figure 1 illustrates the proportion of 3-month stock returns within the Stoxx Europe 600 Index that can be explained by macro factors, and returns that can be explained by micro factors. The chart suggests that the market has not seen micro factors dominate to this extent since the 2017 period. Figure 2 shows the major drop in the average correlation between European stocks in the past four years, from a high in 2020 to a low only seen nearly two decades ago. Our European team has been finding alpha on the short side from a variety of sources such as earnings, accounting and alternative datasets, though we have become increasingly optimistic about the risk/reward profile of our long book.

Figure 1: Percentage of SXXP 3-month stock returns explained by macro versus micro factors

Note: Proportion of stock returns accounted for by ‘macro’ factors based on linear regression of returns over 3M window vs moves in 1) STOXX Europe 600, 2) EU Large vs Small Caps, 3) EU Value factor, 4) EU Quality factor, 5) EU Momentum factor, 6) EU Growth factor, 7) Commodity prices, 8) USD, 9) US 10Y yields and 10) EU credit spreads. ‘Micro’ factor assumed to be the remainder.

Figure 2: Average Pairwise Correlation of European (EU) stock returns over the last 3-months

Tweets from user “Roaring Kitty” fueled another bout of retail frenzied activity in GameStop and AMC, and a resulting short squeeze in high short interest baskets in the US – figure 3 shows the Goldman Sachs Most Short Rolling Basket last traded price reaching +18.22% intra-month. If we look at daily highs and lows, this reached +25.3% intra-month. This is a reminder of how crowded US Long/Short equity can be, especially in certain sectors, and reinforces our philosophy of focusing only on select areas of coverage in the US where we see structural multi-year alpha tailwinds or have identified a differentiated approach in a more specialized area of the market. This is also why we have a larger relative exposure to areas like China Long/Short and European Long/Short, and why we have recently added capabilities in LATAM and CEEMEA Long/Short Equity.

Figure 3: Goldman Sachs Most Short Rolling Basket (GSCBMSAL Index)

Note: GSCBMSAL is an equal-weighted index consisting of the top 50 names in the Russell 3000 as measured by market caps greater than USD 1bn and having the highest short interest as a percentage of float.

We have finalized a couple of analyst hires recently, supporting our specialized equity long/short strategy in Technology and our consumer coverage strategy in European Long/Short. We are excited about the ongoing integration and ramp-up of our Commodities team and a near future allocation to LATAM and CEEMEA equities.
With a keen focus on performance, innovation, and client satisfaction, we stand ready to navigate the complexities of today’s markets and unlock new opportunities for success. Join the conversation: