Balyasny: HFT, Activists Partially To Blame For Tech Decline

Balyasny allocations

In January Balyasny Asset Management Managing Partner and Chief Investment Officer Dmitry Balyasny looked at the market with a degree of concern.  Instructing his portfolio managers to “remain nimble and focus on high beta momentum shorts if the market rolls over,” he noted a prime broker report that showed net long / short positioning among hedge funds near 74% — an all time high in long exposure – and a high correlation to the S&P at 0.9.  His portfolio managers positioned their holdings to manage the downturn, to various degrees, and as of the end of March was up 5.87% while the stock market in general was up just over 1%.  In a conference call and investor letter, Balyasny also noted a potential backlash against activist investor strategies, had comments about high frequency trading and had advice regarding portfolio management in an increasingly slippery stock market environment.

Balyasny: Market looks like a tech bubble

Balyasny noted in the investor conference call that this market looks like a tech bubble, but nothing like 2001 or 2008.  “A new technology television program recently launched called Silicon Valley,” he noted, “just in time for the top in the market in these stocks.”

“The market is not like 2013,” he observed.  “Something significant has changed.”  As such the fund is raising the bar on new ideas and closely watching correlations across sectors while not reducing exposures to extremes.

Balyasny  capital allocation

Small negatives: HFT, activist hedge fund investing

Attempting to put a tag on what has changed is like herding cats at times, he considers a cause for the shift in the US Federal Reserve more hawkish and the guidance had become additionally vague.  Another issue he said dampened the positive party for stocks was the Michael Lewis book Flash Boys about high frequency trading. “Calling the market ‘rigged’ when Internet stocks were getting hammered didn’t help confidence and contributed to the de-risking.”  Nothing HFT was one of the “small negatives” contributing to the market decline, he observed the common professional perception that HFT profitability had peaked five years ago and competition has come into the arbitrage market. In other words he believes much ado about nothing.

Weighing in on the topics of the day, Balyasny said he sees a backlash to hedge fund activism, which he also said was one of the “small negatives” that contributed to the recent tech market slide.  Spotlighting a letter BlackRock, Inc. (NYSE:BLK) CEO Larry Fink wrote to Fortune 500 CEOs saying that they should stand up for long term value creation.

Balyasny  allocations

One word: Cement

Looking forward, Balyasny highlights his best idea as he ends the call: HeidelbergCement AG (ETR:HEI) (OTCMKTS:HDELY).  Balyasny thinks the stock could rise from $62 to $100 per share with a 10% downside risk. “The Cement industry is the opposite of the Interent,” he said, noting the constraints on capacity due to significant regulatory costs of building new plants and the fact cement is overtaking asphalt as the leading material used in road construction.  “The Interent has an unlimited capacity, while cement has limited capacity in increasing demand.”

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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