- Hedge funds are increasingly short term oriented. When the market is rising everyone is piling in on the long side for fear of being left behind and when it is declining they are very quick to cut risk.
- Many quant programs have a large momentum component and the growth of quant investing is exacerbating moves.
- Momentum investing has been working and investors are always chasing performance.
- Retail investors have always herded and they simply cannot fight these massive moves.
The Increased Herding/Momentum Effect
I am still not able to get used to the way the market has been moving in recent months. When the market goes up it does so in a straight line and when it goes down it does so in an even straighter line. Most markets I have traded have taken two steps forward then one step back or vice versa. But this market takes two steps forward than another 10 steps forward before falling back 14. Momentum and the herding effect are more powerful than at any time that I have traded. I believe there are a number of reasons this is occurring: