How Much Did CTAs And Risk Parity Sell During The Friday-Monday Bloodbath?
Right, so last night we brought you the following chart which seems to suggest that at least according to the SG CTA Index, CTAs just had one of their worst 5-day runs in history:
Notably, that was through Wednesday - i.e. not including Thursday's action. “With pain like this, one would hope a significant deleveraging may have already occurred,” Bloomberg's Ye Xie wrote of the wipeout.
There are lingering questions (and really, these questions have been hanging over quants since at
A year from now, when we look back on this past week, I wouldn’t be surprised if it marked the start of a systemic unwind. It certainly feels that way right now, with nothing — nothing — catching a bid. And why would “anything” catch a bid right now? There’s just no reason to buy anything Never seen anything like this setup.
That’s pretty obvious from today, looking back 4-5 days ago.
But the good news is that this ‘systematic unwind’ is/will be short lived, increased volatility = increased trading profits, and all that buying will come back when (if?) we either: a) make new highs or b) volatility decreases. Either way, this is good for everyone who knows what’s up.
As you point out: “… these are model-driven strats, so the de-risking is by definition mechanical. If it’s mechanical then no one is thinking about it.”
Although I am sure, as you point out later in the post, that these algos do modify their models, the assumption when they are kicking in is still that the models are correct. These strats build their models on past data which is virtually never indicative of the future. When a bunch of models have the power to more or less instantly move a trillion dollars around, and they aren’t exactly responding the way they should, it is not really enough for their owners to say: “Oops, that didn’t work; well we’ll give that a tweak so it will work better the next time.” It won’t, of course, because the next time is always different, as BoAML’s excerpted post rather shows. The trouble with “market-by-models” is that the models are always behind the curve. When do we stop trusting them so much and start spending more time trying to figure out what results will happen when they go into action. BofAML sure seems to have missed on that score this time around.
Notional contract values does not equate capital flow
Although the inherent leverage does give more power. But really, that’s what every single hedge fund and prop shop does, so I don’t see where you’re coming from. Models are not ‘always behind the curve’ either, even if you’re only referring to trading models (which i suspect you are) The CTA funds who have a long successful track records clearly show this.