Hamptons Effect

Hamptons Effect

What is the Hamptons effect?

The Hamptons effect refers to a drop in trade that occurs just before Labor Day weekend, followed by an increase in trade volume as traders and investors return from the long weekend. The term refers to the idea that many large-scale Wall Street traders spend the last days of summer in the Hamptons, a traditional summer destination for New York’s elite.

The increase in the trading volume of the Hamptons effect can be positive if it takes the form of a rally, with the portfolio managers trading to firm up overall returns towards the end of the year. Alternatively, the effect can be negative if the portfolio managers decide to take profits rather than open or increase their positions. The Hamptons effect is a calendar effect based on a combination of statistical analysis and anecdotal evidence.

The statistical argument of the Hamptons effect

The statistical case of the Hamptons effect is more solid for certain sectors than for others. Using a market-wide measure such as Standard & Poor’s 500, the Hamptons effect is characterized by slightly higher volatility with a small positive effect depending on the period used. However, it is possible to use sector level data and create a case showing that a certain stock profile is favored after the long weekend. For example, it can be argued that defensive actions, which show consistent performance similar to that of food and public services, are favored towards the end of the year and, therefore, benefit from the Hamptons effect.

Trading opportunities

As with any market effect, finding a model and profiting from it reliably are two different things. Analyzing a dataset will almost always reveal interesting trends and patterns as the parameters change. The Hamptons effect can certainly be interpreted from market data when adjustments are made to the period and the type of stock. The question or investors is whether the effect is large enough to create a real performance advantage after taking into account fees, taxes and spreads.

For an individual investor, the answer is often negative for market anomalies. The Hamptons effect and other similar anomalies that can be interpreted from the data are interesting results, but their value as an investment strategy is not significant for the average investor. Even if a market effect seems consistent, it can quickly dissipate when traders and institutional investors implement strategies to take advantage of the arbitrage opportunity.

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