Overcrowded index rebalance trade reaps heavy losses for hedge funds

Index-rebalance trading soared has in popularity at funds like Millennium, ExodusPoint, and Point72.

The crux of the strategy involves buying up shares in companies slated for inclusion in an index and selling short the companies about to get booted. Trillions of dollars in passive investment funds like ETFs are dedicated to tracking these indexes as closely as possible, meaning the changes — telegraphed weeks in advance — result in significant, and usually reliable, price moves: The added stocks rise and the deleted stocks fall.

But the swings have been exacerbated by how crowded the strategy has gotten, as have the effects of traders forced to unwind positions, people involved in the trade said.

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