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Quants Discover A Guaranteed Source Of Alpha: Just Trade Based On The Growth Of...

•, by Tyler Durden

It was almost 9 years ago in January 2012 when - in a world that was becoming increasingly centrally-planned by central banks and disconnected from fundamentals - we first recommended to readers that the simplest way to generate alpha and outperform the broader market was to do the opposite of what Wall Street's professionals were doing, and go long the most hated stocks. This is what we said one year later, in 2013, when reviewing and doubling down on this very strategy:

...  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.

Fast forward to early 2019 when none other than Bank of America confirmed that we were correct: as the bank's chief equity strategist Savita Subramanian wrote last April, "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 the bank added, the 10 most neglected stocks had 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.