David Einhorn, founder of Greenlight Capital, believes that passive and algorithmic trading have fundamentally broken the market, making it significantly harder for value investors to find undervalued stocks. With fewer traders paying attention to fundamental merits and instead chasing after price, overvalued equities are gaining the most. Einhorn expressed frustration at the shift away from actively managed investment and the pressure on stocks to pay out, as well as the impact of algorithmic machine trading on stock prices. Despite Greenlight's 22.1% gain last year, Einhorn highlighted limitations due to losses on the fund's short positions.
Global hedge funds using algorithms to trade stocks experienced one of their worst days of the year on Thursday, as a sharp rally in shares caught them off guard. Systematic fund managers, particularly those with short bets on highly traded stocks, found themselves stuck in losing positions as they tried to exit crowded trades. The index tracking these funds had its third worst single day of the year, finishing down 1.1%. The rally was fueled by hopes that global rate hikes are over, as well as positive quarterly financial updates.
Hedge funds that use computer algorithms to trade equities are expected to start selling $20 billion to $30 billion worth of stocks in the next two weeks, according to a note from UBS. These hedge funds, which have turned neutral from bullish on stocks, are anticipated to follow recent negative performance and sell stock, potentially exacerbating the downward move in shares. This will be the first time these hedge funds will be net short equity markets since November 2022.
