‘Massive Risk-Management Exercise’ Seen In ‘Right-Tail Event’

Someone may have been playing catch-up on Tuesday.

According to one popular strategist’s hypothesis, a large portfolio (or multiple portfolios) dialed up beta after spending weeks in the bunker in an effort to get back on offense as the market looked poised to run away to the upside.

A Nomura factor that proxies a long-short strategy which rebalances on the last day of the month to go short the top decile of the Russell 1500 versus long the bottom decile, notched a 4.5% one-day return, the bank’s Charlie McElligott wrote Wednesday. That was a near five-standard deviation move.

For context, Tuesday’s right-tail event (in the green box, above) was the second-biggest one-day positive move since the original Pfizer vaccine efficacy announcement.

“Generally speaking, we believe this factor picks up the powerful phenomenon that is monthly, mechanical rebalancing flows due to the exponential growth of passive products in today’s market structure,” McElligott said.

But this was probably more than that. It was likely attributable (at least in part) to an abrupt turn in 2022’s bombed-out thematic expressions, as shorts in all things “froth” (think profitless hyper-growth and other poster children for the post-pandemic speculative mania) were covered and instead leveraged into as a way of jumping aboard a moving train.

“It makes sense to interpret this as perhaps coincidental timing which captured an unwind or a capitulatory stop-out into the end of January as a number of recent themes reversed hard [on] the first trading day of the new month,” McElligott went on to remark.

“My guess is a massive exposure risk-management exercise, but not in the usual ‘risk-down’ sense, as this time around, I’d surmise that somebody large in the (Quant?) Leveraged Fund space took-up their portfolio Beta in a major way,” he added.

One thought on “‘Massive Risk-Management Exercise’ Seen In ‘Right-Tail Event’”

My childlike sense of fairness naively asks if the time has arrived to progressively tax HFT giants? If these sorts of mechanical machinations are gyrating the Market this much, then perhaps a calibrated response ‘governor’ needs to be installed? Sounds a tad warped that the privileged few engage in risk-management exercises that periodically puts us all at increased price/volatility risk. If an informed observer like McElligott can only “guess” at who is driving these moves then the secondary benefit of adding some cost to the “major” moves will provide valuable info for researchers/regulators/tax-collection.

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Hungry Worm

February 3, 2022 at 12:55 ams Reply

My childlike sense of fairness naively asks if the time has arrived to progressively tax HFT giants? If these sorts of mechanical machinations are gyrating the Market this much, then perhaps a calibrated response ‘governor’ needs to be installed? Sounds a tad warped that the privileged few engage in risk-management exercises that periodically puts us all at increased price/volatility risk. If an informed observer like McElligott can only “guess” at who is driving these moves then the secondary benefit of adding some cost to the “major” moves will provide valuable info for researchers/regulators/tax-collection.