Momentum Funds

Hedge funds are having a terrible year. While they are loathe to admit it, most hedge funds run a momentum strategy. De-risking when things look bad and re-risking when things look good is a momentum strategy by another name. They like to call it risk management but it is momentum.

In many cases it is not the hedge funds fault as clients split at the first sign of any draw down. Taking a stand becomes a life or death gamble for a hedge fund. I know a few people that recently have started hedge funds. I have been told that nearly every prospective investor wants to know about risk management strategies. My risk management strategy is to buy cheap. That type of answer would not fly with most institutional investors. They want to hear about stop losses and other strategies that essentially turn a hedge fund into a glorified momentum fund.

I believe that a primary reason for the volatility we have been seeing is that there are so many momentum strategies out there. While the news flow has been volatile the moves get amplified by momentum strategies. This volatility offers excellent opportunities for value investors who use prices to their advantage or mean reversion traders who buy at points of pessimism and sell at optimism.

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