Over the past two months, as the 2019 risk rally powered ahead, a fixture of the bull thesis was the idea that because the Q1 equity surge was a “flow-less”, begrudging affair characterized by a lack of participation by key investor cohorts, those who remained on the sidelines would eventually be “forced” in, either by the siren song of FOMO or else mechanically, as suppressed vol. and “in-trend” markets dragged the systematic crowd to the party.
In short, then, questions about whether the rally was/is sustainable have been “answered” in the affirmative by way of a thesis that assumes reluctant money eventually “capitulates” as underperformance to benchmarks mounts.
For example, while hedge funds have had a decent year, Q1 gains were still woefully short of those logged by the S&P.
“Given [low] liquidity, it is plausible that just short covering, buybacks, dealers’ gamma hedging, and some limited releveraging drove the entire recovery [and] this, in turn, opens the possibility that the current rally can continue during the spring”, JPMorgan’s Marko Kolanovic wrote late last month, after reiterating the extent to which a variety of investor groups were still under-exposed.
Well, on Thursday, Nomura’s Charlie McElligott offers a collage of familiar – if poignant – visuals showing just how pervasive the underexposure is.
First, he reiterates the “flow-less” character of the rally, noting that EPFR Global Equities and Bond fund flows YTD show $91 billion out of Global Equities and $120 billion into Global Bonds.
(EPFR, Nomura)
The next set of visuals are, for the most part, replicable on the terminal, but we’ll just use Charlie’s here. Below are betas to SPX for the Long/Short crowd and macro funds (top row) and Long/Short beta to Nomura’s beta factor and leveraged positioning (bottom row):
(Nomura)
“Nomura QIS Risk Parity model estimates fresh 2-year+ lows in US Equities $Exposure (Across SPX, NDX, Russell)”, Charlie continues, adding that the 2 year look-back window “is capturing more of the ‘2018 ‘QE to QT’ macro regime, which was representative of the narrative that ‘we have tightened ourselves into a slow-down / recession’.” In other words, you’re seeing the fallout from last year’s regime change.
(Bloomberg, Nomura)
Finally, Charlie revisits a familiar refrain re: what this does in terms of facilitating “grabby” behavior as the rally runs.
“All of this does this“, he says (so that’s two “this”‘s), where “this” means “epic Delta %iles as underexposed funds ‘grab’ at upside through upside“.
(Nomura)
Meanwhile, those wondering about McElligott’s famous CTA model will be interested to note that according to Charlie’s Thursday piece, systematic trend has “violently RE-LEVERAGED”. To wit:
Systematic Trend / CTA has violently RE-LEVERAGED into US Equities (from “Max Short” in Dec ‘18 to current “Max Long”), with $Notional Exposures at 7 month highs as the already +100% Price Signal continues to see the notional position size continue to grow due to the collapse in trailing realized volatility across the short- to mid- term models.
(Nomura QIS, Bloomberg)
Read more
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Discretionary macro managers may be underexposed, but one of Kevin’s recent pieces and other charts that are floating around suggest retail is all in and foaming at the mouth. Unlike Kevin, though I see his logic, I think I’ll stick with former–especially since it looks to me like macro data has continued to deteriorate outside of a handful of merely okay prints.
That’s right Chris…. In addition to that probably everyone has shifted to the same side of the boat the last three weeks…..
Remember most equity fund managers can hold very low levels of cash and “hedge” by buying “defensive” stocks which may be some tech names or health care not always staples, utes, etc. Pension, Ins guys move slowly. HFs can move quickly but were shell shocked in Q4. The short term perfect pressures lead to poor decision making often leading to pros underperforming too often. I hope for their investors they don’t play the greater fool game but rather stay patient and buy below intrinsic (which fairly is often elusive) and have a margin of safety.
People forget illiquidity can be a b!tch also…………….
Money sloshes around so much and so fast nobody really knows who is in and who is out. I have heard that retail is completely out, and someone above said that retail is all in and foaming at the mouth. Clearly, it can’t be both out and all in.