The steady grind higher in equities and well-anchored volatility has translated into elevated exposure for systematic strats, although just how elevated depends on which strats you're talking about, and who you ask.
One thing we can all agree on, though, is that exposure is running high for the vol-targeting crowd. This is common sense, and it has echoes of January 2018.
"Given the decline in volatility, volatility targeters are fairly long equities, with exposure in the ~80th percentile", JPMorgan's Marko Kolanovic wrote Wednesday. Morgan Stanley concurs. Vol-targeting leverage is now in the 81st percentile since 2011, the bank says.
The visual is a proxy for vol-control exposure. What you'll note is that it's characterized by a demonstrable "escalator up/elevator down" tendency. In the simplest possible terms, some worry that with exposure now running near the highest levels since just prior to the February 2018 VIX ETN "extinction event", the market could be set up for a nauseating ride down the elevator.
This is, to a certain extent anyway, another manifestation of the tail wagging the dog. "Volatility is the trigger", Nomura's Charlie McElligott remarked, in an ex
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