Factor Investing Risks: When Crowding Creates Chaos

Introduction
Large Cap
Small & Mid Cap
Kailash Product Performance
Conclusion

Introduction

We have read numerous press articles discussing the difficulties faced by several successful hedge funds towards the end of March and in early April. The recent market turbulence seems to have impacted funds and strategies with highly diverse approaches to alpha generation, and Kailash has felt these shockwaves as well. Macro funds, growth funds and specifically the technology and health care sectors have been mentioned in some articles as having taken a conspicuous amount of damage.

The recent turmoil and many client inquiries spurred us to look at some other periods of unusual market turmoil, including the “Quant Crash” in August 2007. Along with this commentary on our thoughts about the recent market behavior, we are publishing a report on our findings from researching the quant crash, entitled Correlation, Contagion & the Quant Crash: Fundamentally Driven Process vs. Pattern Recognition.

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While we heard of funds struggling mightily in March, our Core Kailash products began to suffer in the first few weeks of April. In light of this we chose to keep our analysis confined to April 1-10 when we could be more confident that our data would have a better chance of capturing anomalous market trends.¹ Our analysis of both our Large Cap and Small & Mid Cap stock universes demonstrates that the problems faced by many money managers are for “good reason.” To put it bluntly: the market’s behavior has been anything but normal since late March.

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SERVICES

As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital Research, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital Research, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital Research, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital Research, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.