The Market Is Crashing: Is the Bogeyman Risk Parity or CTAs?

Submitted by Peter Tchir of Academy Securities

In our family, it was Baba Yaga who was going to “get you” if you weren’t well behaved.  Whether it was the boogeyman, or some other fear that kept you awake at nights, it is time to consider what the next ‘pain trade’ might be.  While the focus has been on Risk Parity or Risk Parity Lite (my personal favorite), what is the next big strategy at risk? Could it be Commodity Trading Advisors (or CTAs)?

Salient Risk Parity Index versus Soc Gen CTA Trend Index Since July 2017

These two asset classes were moving somewhat in lock-step for much of the second half of 2017.  They started to separate a little bit in December and accelerated at the start of this year.

Simplest Explanation of the Chart?

The simplest explanation is that both were long stocks but one was long bonds and the other was short bonds (if you are looking for who holds all those short future future position shorts in bonds – probably think CTA). 

Commodity positioning probably had something to do with the performance as well, but I would argue that CTAs are very long equities and very short bonds – and have benefitted from that.

Simplest Explanation CTAs

At the risk of annoying the CTAs on my distribution list, I don’t think we lose too much by simplifying CTAs to

  • Largely systemic, or model driven
  • Largely trend following, or momentum

Which Strategy Is More at Risk of Position Changing?

I think CTAs might be more at risk of having to stop out.  On the Risk Parity side, I am not seeing evidence of outflows, if anything I am hearing some anecdotal evidence that the strategy is more interesting here – instead of your ‘hedge’ paying 2.4% it is paying 2.85% (depending where on the treasury curve you put on the hedges).

CTAs are always at risk of changing position – they are systematic, and momentum driven and by their nature constantly ‘looking’ for reasons to change position or direction (they tend to be remorseless when they do – though remorseless confers human emotions to what would be an algo driven policy).

CTAs are exposed to bonds doing ok and stocks doing poorly (which is my current view of the world). 

With 10-year yields breaking my 2.8% initial target (I still think 3% could be in play) much of the move to higher yields may be over, which would not be good for CTA positioning.

Any classic ‘risk-off’ move would be problematic, and while we haven’t seen a true ‘risk-off’ move, we did see the flight to safety trade directed to the 2-year treasury on Friday.

I for one am leaning towards the real boogeyman being CTAs.

* * *

Where Have All the Vol Sellers Gone?

If anything, while seeing which strategy might be most at risk, I am waiting to see sustained selling pressure on VIX.  Vix has sold off this morning from overnight highs, but I think is far from signaling the all-clear sign, especially after the recent surge in buying.

The real clue to exposing the boogeyman might be seeing what triggers real fear in the volatility markets.  On Friday we saw some signs, but it seems like today, retail is coming back to sell VIX (I will admit that I too am hoping to time a nice short volatility trade in my personal account) although that has since reversed sharply with the VIX surging above 24...

 

Comments

whatswhat1@yahoo.com ACP Mon, 02/05/2018 - 14:52 Permalink

...another 666 day.

guidance or ominous, cryptic warning?

FASTEN YOUR SEATBELTS

...777?

 

666=BEWARE???

777=BTFD???

 

24,743.26  -777.70 (-3.05%)

ARE WE SHOOTING FOR A -777.77?

 

 

The number eight is considered to be a lucky number in Chinese and other Asian cultures.

close -888???

whoops...already in the -900's in the time it took to type that

 

...plunge protection team wakes from their eight year slumber

...algos triggered

 

 

 

bitcoin's parabolic run is / was evidence of too much liquidity in the system chasing "yield" by going waaaayy out on the risk spectrum ( bitcoin has no value besides it's theoretical application, at least fiat US dollars are backed by nuclear weapons ).

 

 

 

In reply to by ACP

whatswhat1@yahoo.com eclectic syncretist Mon, 02/05/2018 - 15:23 Permalink

 

bitcoin's parabolic run is / was evidence of too much liquidity in the system chasing "yield" by going waaaayy out on the risk spectrum ( bitcoin has no value besides it's theoretical application, at least fiat US dollars are backed by nuclear weapons ).

 

wall st and uncle scam are indecipherable now. they should replace the statue of liberty with a warren Buffett statue.

In reply to by eclectic syncretist

whatswhat1@yahoo.com TeamDepends Mon, 02/05/2018 - 15:30 Permalink

Not to worry my good man...

 

at this point though we still are in a centrally planned economic system and a market under the thumb of price controls. barring a unforeseen systemic meltdown - like a default on US Treasuries, run on the US dollar, or armed revolution - the market is still a matter of "national security" and totally manipulated.

 

wall st and uncle scam are indecipherable now. they should replace the statue of liberty with a warren Buffett statue.

In reply to by TeamDepends

ThanksChump ACP Mon, 02/05/2018 - 15:16 Permalink

"This market is crashing so hard, we're all the way down to where we were last month."

 

I laughed out loud, and my dogs jumped up to see if a treat was forthcoming.

 

I wonder how many brokers are excited in anticipation of the usual Fed's banker treats that are surely about to be handed out.

In reply to by ACP

Al Huxley Squid Viscous Mon, 02/05/2018 - 14:48 Permalink

If you have visibility into recently established large option positions you can forecast what the next disaster is going to be with a high degree of accuracy.  Of course, if you could have found out Silverstein had just insured the WTC towers for a mint in the months prior to the 'terrorist attack' you could have known something was up, but it was the puts on the airlines that would have been the real tipoff as to what was coming.

In reply to by Squid Viscous

cowdiddly Mon, 02/05/2018 - 14:48 Permalink

Its called a big fat margin call. having to sell everything that isn't nailed down playing around with other peoples money.

Everything, and I mean EVERYTHING is selling off hard for 3 days even with them pumping the shit out of the bonds today, markets don't even care now.

now the question is where will all this hot money end up next?

wmbz Mon, 02/05/2018 - 14:49 Permalink

Hey, this Jerome's first day!

You know damn well 'Ol Jack pulled some keys off the keyboards. Super glued others. Switched codes, to buy means sell and sell means buy.

You know just fucking with the newbie! Jerome will get it all figured out, sooner or later. His phone is being burned down from the boyz, yelling hey Jerome get your shit together or we'll kick your ass!