Submitted by Eric Peters of One River Asset Management
“How would you like a new 4 Sharpe strategy?” asked the salesman. “Tell me more,” replied the portfolio manager. “You buy a swap from us that will continually sell weekly S&P 500 variance, but instead of that variance being measured based on the daily price change, it measures volatility multiple times each day.” Well that’s new. “Who’s buying this stuff?” asked the portfolio manager. “Everyone’s buying,” said the salesman. Just when you think we’d run out of innovative ways to profit from nothing happening, along comes something else.
“If everyone is selling intraday variance, I think I’d rather buy it,” said the portfolio manager. “Oh, well, that’s great! With so many people selling, our trading desk is way too long. So we’re looking for ways to recycle this risk,” said the salesman. As people buy these variance swaps, and therefore sell intraday volatility, the issuing banks get long volatility. To hedge the risk, they sell intraday rallies, buy dips. Which dampens volatility. And their clients are all happy, unless of course there’s a flash crash. Or through an act of god, an overnight gap.
“The consensus was to be long dispersion,” said the trader, returning from an idea dinner. “It’s the trade that has profited from idiosyncratic stock movements for the past year even if the S&P 500 index has been flattish.” Long dispersion is a bet that the difference between the best and worst performing stocks will be wide. That’s the opposite of short correlation. Long correlation is a bet that all stocks move up and down in unison. “And the classic is that people now talk about long dispersion (short correlation) as a hedge against a flattish S&P 500.”
When Tides Turn:
“They are punishing our country for the neoliberal policies applied in the last 36yrs, which were a complete failure, especially in the last few years,” said Mexico’s President AMLO, the rating agencies cutting their outlooks to negative. “We had nothing to do with the government then, but we have to pay the consequences,” he continued, vowing to hold a referendum on whether past presidents should be put on trial for the neoliberal policies he says hollowed out state companies, allowed corruption to spiral and provoked deep social inequality.
British insurer Legal & General profits jumped as annuity sales soared and changes to life expectancy boosted its bottom line. The rate of improvement in life expectancy slowed dramatically, as people die earlier than expected, allowing insurers to release reserves they hold to pay future pensions.
The CEO hinted there could be more to come as the company continues to adjust assumptions about how long customers might live. “There’s been a long discussion about whether this is a blip or a trend, and sadly it’s looking like a trend,” he said.