Marko Kolanovic Explains The ‘Liquidity-Volatility-Flows Feedback Loop’

Marko Kolanovic Explains The ‘Liquidity-Volatility-Flows Feedback Loop’

When last we checked in on JPMorgan's Marko Kolanovic, the Street's most recognizable name was weighing in on the complete "collapse" of confidence that played out during the worst December for US equities since the Great Depression, but also on the necessity of understanding the nuance of the systematic flows discussion. That latter point is even more critical now than it was prior to Q4. The investing public's understanding of how systematic flows impact the market is not growing commensurate
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3 thoughts on “Marko Kolanovic Explains The ‘Liquidity-Volatility-Flows Feedback Loop’

  1. “Excluding purely passive index funds, today’s flavors of rules-based strategies amount to about $1.7 trillion.
    Systematic-quantitative and hedge-fund strategies comprise about $1.2 trillion, and smart beta strategies add
    about another $0.5 trillion.
    The transition from discretionary portfolios to semi-passive, systematic-quantitative, and even purely passive
    strategies involves selling losers and accumulating winners.
    As long as these rules-based strategies grow, they support market momentum and price moves become detached from fundamental values.
    The accumulation of assets in rules-based strategies has reduced fundamental discretionary trading volumes to
    only about 10% of total volume.”

  2. Right, Gandalf. Where it comes to winning, it’s the little guys who get stuck suffering to carry the ring to be destroyed no matter your return from death…but you already knew that…

  3. Spot on. I have been trading for 30+ years and vol has always been my friend. It creates opportunities on the long side on spikes and typically the short side on low vol. But that has changed over the years and the reflexivity makes it more difficult. As a fundamental investor buying discounted stocks and selling perfection worked well. But the danger is when price action causes a fundamental response (layoffs, cap spend redux, etc) causing a change in the fundamentals. So a bank stock may not loan as much etc.

    I know what Marko talks about has made me re-evaluate my investments and become more discerning factoring in the threat of reflexivity (both positive and negative) and my need to look for larger discounts and premiums. Some areas of the market are almost uninvestable due to the changes in the markets.

    But I still view the ability to play time arbitrage the greatest alpha advantage individuals and a few funds (Berkshire and a few others) have over the vast majority of funds running money with daily and quarterly performance pressures.

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