The simple and stark truth is that the phenomenon of a quarter end mark up in equities is a myth.
First the statistical evidence. I reviewed the last eight quarter endings, taking note of the closing prices of the SPY’s on the two days prior to month end, the preceding pattern and the first two days of the new quarter as well as the ensuing days of activity. It would be reasonable to expect that the market would sell off on the first couple of trading days of the new quarter if it were being marked up at prior month end window dress a portfolio but that occurred in only 2 out of the last 8 quarters, one of those events being immaterial and the other a move from 113.15 to 109.93; this occurred in 3Q 2011. The next trading, 10/4, saw almost a full recovery to month ending levels. Furthermore, in 7 of the 8 periods, the uptrend of the first 2 trading days of the new quarter continued over the next week or so.
Now, the empirical evidence. Long only funds generally run with low cash levels as mandated either by asset allocators or charter. Hedge funds, that is the good funds, the professional funds, could care less about supposed month end markups, preferring to stay disciplined and loyal to their strategies. After all, that is how they became successful. In fact, I can’t say I know of any investors, big or small, that is willing to make an investment decision based upon what they believe a bunch of insignificant players may or may not do into month or quarter end. That would essentially be ceding the management of their funds to those individuals and that is not about to happen. Furthermore, transparency has increased dramatically with most funds. I know how I would feel as an investor if the fund I was invested in told me they were 40% net long on the 25th of the month because of their assessment of the market and opportunities and then were all of a sudden 60% net long – or higher – as the month drew to a close when the investment case was unlikely to justify such an increase in exposure. I don’t invest with managers who play those games because they are too hard to play.
Of course, there is the possibility that specific, illiquid issues could be manipulated higher into quarter end – I’m not naïve – but I do believe that this activity is insignificant and in a more highly regulated industry, where penalties have actually become very harsh for doing so and the reward paling in comparison to the risk, is much less common than it was years ago. But we need not debate the quarter end mark up issue since the facts make a compelling case that it doesn’t happen. Sure, conspiracy theories are fun to talk about and a convenient excuse as to why a fund manager is under invested but until they actually find the loch ness monster, I’m not a believer. I’ll just chalk it up to people trying to sound smart.
Oh, and this is a helluva a mark up the last two days. Nuff said.