Quant Crash: Human-Robot Blame Game Escalates As CTA, Risk Parity Scapegoating Reaches Fever Pitch

Quant Crash: Human-Robot Blame Game Escalates As CTA, Risk Parity Scapegoating Reaches Fever Pitch

I'll confess I'm not 100% sure why so many people seem to be zeroing in on that last-minute panic bid on Friday afternoon as a sign that the equity rout is over. I mean sure, better a dramatic stick save than no dramatic stick save, but Friday wasn't the only green day last week and it wasn't the only day that saw wild swings and panic buying. So I guess it's not entirely clear to me why anyone should read anything more into Friday than they did into Tuesday. https://twitter.com/heisenbergrpt
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8 thoughts on “Quant Crash: Human-Robot Blame Game Escalates As CTA, Risk Parity Scapegoating Reaches Fever Pitch

  1. Thanks, excellent article. I can always tell when I’m learning a lot from your articles based on the number of times I read a sentence out loud to myself, parse it, digest it, decipher it…. and then discover the answer that I painstakingly arrived at was just a little further down. Also, exhibit A for why I don’t work on Wall Street, lol.

  2. Trend following CTA models each have added bells and whistles, but you can approximate approximate like 75% of trend-following CTA flows using a simple 25/50 day breakout to enter and exit while taking into account vol-adjusted position sizing from both CTAs and obviously risk parity.

    This is how I see the action over the past week.

    You have rising yields which created initial rise in vol. This caused rebalancing/minor develeraging last Friday. This in turn caused a new 25 day low, which signaled to close positions, leading to violent movement on Monday. Tuesday, panic buying by the BTFD crowd. Thursday I suspect was driven more by updated VaR models, with minor impact from lagging CTAs and rebalancing from CTAs.

    Granted this is overly simplistic. But I contend this explains well above 50% of price movement. If I’m right, the move is done. Institutional money now has rebalanced or hedged exposure, but there is no systematic issues that would lead to lower confidence in equities, and I don’t expect any further major decrease.

    What I don’t know is if the BTFD crowd will be back in force on Monday, but I’ll be buying VIX puts either way.

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