There’s some nascent unwind risk emanating from the CTA universe.

I realize that’s a little — what’s the word? — jargony for the average reader, so let me try to put it in layman’s terms.

Strategies that allocate mechanically based on prevailing trends across assets are now crowded into a trio of trades that keep working — namely metals longs, dollar shorts and, of course, good ol’ stocks.

The figure below gives you a sense of how it’s been going (good) for trend-following strats over the last six or so months. It shows Nomura’s replication model which tracks very well with the widely-cited SG Trend Index.

CTAs are “riding the bubble winners, staying engaged in big longs across equities and metals,” Nomura’s Charlie McElligott said Thursday, adding that short USD positioning’s likewise contributing to returns.

The metals longs and anti-dollar trade are of course a reflection of the geo-strategic, macro zeitgeist. “The central theme continues to press on, as Trump earlier this week explicitly endorsed further ‘weak dollar,’ beggar-thy-neighbor competitive devaluation policy in his run-it-hot pursuit to unwind the ‘exorbitant privilege,’ boost exports and inflate away debt,” McElligott wrote, adding that Trump’s “go-it-alone” approach is intended to reposition America “for a future state of the world where power = commodities security, requiring direct ownership and strong-armed access to resources and the supply of ‘things that matter,'” from precious to base metals, from energy to semis.

I’m compelled to praise McElligott for his remarkable range — for the subject matter dexterity on display in his notes. Charlie’s cross-disciplinary abilities extend well beyond his capacity to weigh in expertly across the financial asset spectrum.

The figures below, from the same Thursday note, give you some context for what he means when he talks about crowding into these forever-trending trades.

The annotations spell it out: CTA net longs in stocks and metals are 90%ile and up, and the net dollar short across FX is unprecedented.

The potential problem is that because these are systematic strategies, the allocations aren’t based on someone’s well-reasoned assessment of the macro-geopolitical landscape. This is AUM allocated unemotionally based on the trend.

In some ways, that’s good. For one thing, there’s wisdom in the trend: These trades are working for a reason. Also, as McElligott put it, “systematic managed futures are keeping many ‘in,'” allowing investors to “remove themselves from the psychological warfare of trying to guess at picking tops when risk-managing winning positions.”

On the other hand, when you remove the human “expert” element and replace it with a strategy that’s just chasing the trend, and then you throw in armchair political scientists with IBKR accounts and retail investors “pouring into stuff they don’t know well,” to quote Charlie’s generous characterization of home-gamer macro tourists, you end up with one-sided positioning that isn’t hedged well, and that’s vulnerable to tipping over.

“The risk is [that] a lot of ‘lazy longs’ in equities and metals have enjoyed extremely high Sharpes [and a] ‘smooth glide,’ which then risks a profit-take spilling over into a larger risk management exercise of forced selling into skinny exits,” McElligott said.