The Russell Rebalance

The 2022 Russell Rebalance was a reminder of the risks of the “crowded trade”. Index Rebalance is a popular arbitrage strategy. Historically, stocks scheduled to be added or deleted from an index are projected weeks in advance. Stocks to be added generally increase in value since EFT’s and index tracking funds are required to buy them. The opposite is generally the case for stocks scheduled to be deleted.

Large hedge funds like Millennium Management reaped considerable profits from this strategy in the past. It’s no surprise, in a copycat industry, that hedge funds such as Citadel, ExodusPoint, Balyasny, Schonfeld, and Point72 among others have also built out teams tasked with replicating this success. However, hedge funds can express this arbitrage with varying risk profiles. In addition to going long and short the projected equities, some use derivatives to offset excess exposure, while others attempt to address or neutralize embedded factor exposures

June 2022 Outcome

In June 2022 however, the Index Rebalance strategy suffered substantial losses. In the weeks prior to the June 27th refresh, the stocks scheduled to be added to the Russell indices sold off in volume, while the equities slated for subtraction from the index outperformed to the upside.

Sector Volatility and Factor Exposure

The preliminary list of changes to the small cap Russell 2000 came June 3rd. According to Wells Fargo data additions to the index fell 11.1% since the announcement. Factor exposure to the energy sector is one potential catalyst for the volatile June 2022 outcome. A number of key 2022 additions to the Russell indices came from energy shares. Energy, with a 30% gain, was the best performing S&P 500 sector on the year coming into June. This reversed rapidly for the month with the S&P 500 selling off 21% after a June 8th high.

Source: Bloomberg


The risk management resources large hedge funds enjoy were challenged when this annual arbitrage rapidly deteriorated into an overcrowded, volatile, and factor intensive environment for the month. The Russell Rebalance of 2022 is a vivid reminder of the value of active risk management and factor mitigation as well as the risks inherent to “overcrowded” trades.

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