• Index-rebalance trading soared has in popularity at funds like Millennium, ExodusPoint, and Point72.
  • The overcrowded strategy got torched when trades anticipating the Russell 3000 recomposition went awry.
  • Traders that wager on changes to passive indexes have suffered substantial losses.

This year's reshuffling of the popular Russell indexes has investors on edge. 

The 2022 refresh of popular Russell indexes is scheduled for June 27. The closely watched event usually goes off without a hitch, while also allowing a whole industry of traders and hedge funds — from Millennium to Citdael — to make a ton of money.  

This year, however, the popular abitrage strategy known as index rebalancing has turned into a bit of a bloodbath. With the June 27 deadline fast approaching, there's concern that the event will lead to increased jumpiness in an already nervous market on Friday, the last day of trading before the planned index changes are finalized.  

Stocks scheduled to join or be deleted from these indexes are projected weeks in advance, allowing traders to place their bets on the company shares they think will rise or fall. Stocks slated to join an index normally go up in value as EFTs and other funds that track indexes are forced to buy them en mass. Stocks scheduled to be deleted usually decline in value.

But as Insider recently reported, stocks scheduled to join the Russell 300 on June 27  tanked in the weeks leading up to the recalibration. Further confounding traders, stock scheduled to be subtracted from the index outperformed. Traders have suffered substantial losses, industry insiders said. 

"The names that were deleted, you would expect them to go down, but instead they're going up,"  a portfolio manager told Inside. "It's the entire Russell trade going the wrong way."

One word that repeatedly comes up in trying to explain the switcharoo is "overcrowded." Large hedge funds, like ExodusPoint, Balyasny, Citadel, Schonfeld, and Point72, have all built out big teams dedicated to the space in recent years in an effort to replicate the massive profits earned by $55 billion multi-strategy giant Millennium Management. 

The most prolific portfolio manager across the strategy is Glen Scheinberg, whose index-rebalance profits helped make him Millennium's top performer in 2020 and among the top last year as well.

Read the original article on Business Insider