What is the Hamptons Effect?
The Hamptons Effect refers to a dip in trading that occurs just before the Labor Day weekend that is followed by increased trading volume as traders and investors return from the long weekend. The term references the idea that many of the large-scale traders on Wall Street spend the last days of summer in the Hamptons, a traditional summer destination for the New York City elite.
The increased trading volume of the Hamptons Effect can be positive if it takes the form of a rally as portfolio managers place trades to firm up overall returns toward the end of the year. Alternatively, the effect can be negative if portfolio managers decide to take profits rather than opening or adding to their positions. The Hamptons Effect is a calendar effect based on a combination of statistical analysis and anecdotal evidence.
The Statistical Case for the Hamptons Effect
The statistical case for the Hamptons Effect is stronger for some sectors compared than others. Using a market-wide measure such as the 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 following the long weekend. For example, the case can be made that defensive stocks, which are consistent performers similar to food and utilities, are favored as the end of the year approaches and, therefore, benefit from the Hamptons Effect.
As with any market effect, finding a pattern and reliably profiting from a pattern are two different things. Analyzing a set of data will almost always reveal interesting trends and patterns as the parameters shift. The Hamptons Effect can certainly be construed 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 true performance advantage after fees, taxes and spreads are considered.
For an individual investor, the answer is often to the negative for market anomalies. The Hamptons Effect and other similar anomalies that can be construed from data are interesting findings, but their value as an investment strategy is not significant for the average investor. Even if a market effect appears consistent, it can quickly dissipate as traders and institutional investors implement strategies to take advantage of the arbitrage opportunity.