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Nearly six years ago, back in 2013, we presented what we then viewed (and still view) as the best trading strategy of the New Abnormal period, when we said that buying the most hated/shorted names while shorting the names that have the highest hedge fund and institutional ownership is the surest way to generate alpha, to wit:
... in a world in which nothing has changed from a year ago, and where fundamentals still don't matter, what is one to do to generate an outside market return? Simple: more of the same and punish those who still believe in an efficient, capital-allocating marketplace and keep bidding up the most shorted names.
Forward - Today - Bank - America - Confirms
Fast forward to today, when Bank of America confirms that, with just one exception, the historically unvolatile 2017, this strategy has continued to be consistently profitable, as "over the last several years, buying the most underweight stocks by large cap active funds and selling the most overweight stocks by large cap active funds has consistently generated alpha." As BofA adds, the 10 most neglected stocks have outperformed the 10 most crowded stocks by an annualized spread of 8.4% on average during the first 15 days of each quarter since 2012. This is shown in the chart below which reveals that buying the 10 most underweight stocks and selling the 10 most overweight stocks by active funds has generated alpha every year in the past five except 2017.
And despite the market's torrid gains in January and February , this strategy continued to generate profits even in 2019, because after another year of near-record active outflows from active funds(~$370bn), this trend persisted in the first quarter, generating alpha of over 7% according to BofA as the vicious short squeeze of January and February resulted in an outperformance of the most shorted stocks relative...
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