“With the simple mathematical reality of realized volatilities over short-term (trailing) windows likely collapsing lower under their own prior weight, it was my expectation that we would see many vol-sensitive systematic strategies either re-leveraging into Equities ‘long’ exposures (from historically very underweighted starting points) or likely see significant and widespread covering of prior legacy ‘shorts'”, Nomura’s Charlie McElligott writes, in a Monday note marking his return from a two-week summer holiday.
The majority of that prediction (outlined here) turned out to be correct.
As realized vol. continued to move lower, US equities pressed higher, and with volatility as the “exposure toggle” (one of Charlie’s favorite and most instructive talking points), the systematic universe has continued to mechanically and unemotionally add exposure from low levels.
And so, CTA and vol.-control positioning reflects ongoing buying, albeit still leaving the systematic community “light”, as noted here on Sunday evening.
“In aggregate, the Net $ Exposure across all 13 global Equities futures tracked in the CTA model portfolio is +~$122B since July 2nd and now +$502B from the March 9th 2020 ‘max short’ net exposure lows”, McElligott writes.
That takes overall equities exposure from just 18.7%ile at the beginning of July to the 28.4%ile which, again, Charlie notes is “still historically ‘light'”.
As for vol.-control, Nomura’s model estimates incremental buying in excess of $19 billion in US equity futures over the past two weeks.
That brings the allocation up to more than $100 billion (red in the figure) while still leaving the allocation rank in just the 12.5%ile (black line), notably higher from the 7.1%ile where it sat two weeks back, but still low.
Obviously, how this plays out going forward (i.e., what the future holds for this steady, incremental bid from the systematic universe) depends on the evolution of volatility.
McElligott reminds you that “the size of the position is inversely proportional to the particular strategy’s preferred volatility measure for each security”. That’s the “exposure toggle” point.
As far as what’s next in terms of seasonals and the macro backdrop, Charlie flags ‘risk-negative’ August seasonality” which witnesses “peak illiquidity/de-grossing into holiday season”. You might recall that thin markets exacerbated the problems last August, when the trade war kicked up several notches.
Countering that are “a number of COVID-19 vaccine trial updates between now and then”, McElligott notes, not to mention “Stimulus 4.0” in the US as the ball is now in Mitch McConnell’s court on the next round of virus relief.