(Bloomberg) -- Information on investment flows in and out of stocks can prove helpful for certain types of equity strategies, according to the quantitative team at JPMorgan Chase & Co.
The most effective approach is to combine short-term momentum and positioning data to create a “flow factor” which can be used to aid portfolio selection and generate higher returns, strategists including Khuram Chaudhry and Marko Kolanovic said in a note dated May 26.
With little published research available on the predictive power of flow data, JPMorgan dug into whether they can be analyzed as a factor for improving metrics such as average returns over the risk-free rate, and expected peak-to-trough drops.
“Investment style returns can, on average, be enhanced by the addition of flow data,” the strategists said. “In general, the benefit for long-only styles is observed through lower volatility and increased Sharpe ratios, alongside lower drawdowns. The results are further boosted for long/short portfolios.”
Quantitative fund managers have suffered alongside most other investors in this year’s market crash, adding pressure to strategies that even before the turmoil were struggling to generate the returns of their heyday.
Among JPMorgan’s findings:
- The flow factor has a positive correlation with the quality, momentum and low-risk styles
- Most flow factors show “stellar” performance in Europe, particularly flow momentum
- Flow strategies are less effective in the U.S., though using positioning data can be effective
- Flow metrics are not effective in Japan and across all metrics uniformly underperform
- Flow factors in emerging markets generate mixed results
“Investors typically perceive flows to be a leading indicator,” the strategists said. “Our analysis suggests it may just inform you about what is happening right now and the momentum in the signal may persist for up to a quarter.” Beyond four or five months, the returns and risk-adjusted performance tended to disappear, they added.
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