Commodus And The Tantrum Tail Risk

Those are the dominoes. Don’t tip one.


Nobody Worry, Because The Dallas Fed Has Its Eye On ‘These So-Called Risk Parity Funds’

“And I’ve learned when they do build, they can build very quickly, so we have to be very vigilant about this.”

‘And Yet Here He Is, Laying It All Out Again’: Jim Grant Is Bearish On Ray Dalio.

“They are not investing. Yet here he is, laying it all out to the world again – necessarily doing less of his day job than he would otherwise do.”

You Still Have Made a Choice: The 5 Things that Matter

“It may not be optimal to own the most diversified portfolio you can possibly own, because anti-diversifying decisions might, in fact, be worth it. But it is exactly that thought process that must become part of our code as investors. It’s OK to turn down a free lunch, but you’d damn well better know that what you’re going to spend your money on is better.”

‘I Come Back To You Now’: Kolanovic Returns, Everyone Panics

“…at the turn of the tide.”

‘Things Are Starting To Reverse’: Goldman Warns On ‘Shock’ Risk

“Risky assets digested the increase in bond yields only reasonably well – 3-month equity/bond yield correlations stayed positive (Exhibit 3) and credit spreads buffered part of the increases (Exhibit 4). But correlations are starting to reverse.”

‘The Real Fun Is Just Beginning’: Quants Stare Blankly At Worst Losses In 10 Years

It’s been a long time coming, but the week(s) of reckoning have finally come for CTAs and the risk parity crowd. Of course the “serious people” reading this will say the “day of reckoning” bit is hyperbolic. After all, we haven’t seen a sustained vol. spike of the sort that would probably be required to…

The Risk Parity Unwind Is Underway – But One Strategist Says It’s Fine

Given what we’ve seen this week in terms of DM yields spiking and that spilling over into equities, this is probably a good time to remind you that the 800-pound gorilla in the room is risk parity and the potential for a deleveraging episode. As I’ve noted on several previous occasions, the gorilla analogy probably…

Is Risk Parity Deleveraging The Biggest Risk To Markets?

“However, relative to CTAs there is much less transparency on the total size of assets in risk parity and equity vol control strategies let alone the subset of which is completely rules-based.”

Guest Post: Axe Would Hate Risk Parity

“And then ask yourself, what have Central Banks being doing since the Great Financial Crisis? Buying bonds (they are also buying some equities, but the vast majority of the purchases have been fixed income). What does that do to volatility? It crushes it. And what does lower fixed income volatility mean for risk parity? They buy more.”

“This Is No Different” From 1987: Is Marko Kolanovic Right?

“When an institution allocates to a momentum strategy in the hope of cushioning itself from stock market downdraughts it is really commissioning someone to sell stocks on its behalf into a falling market.”

Chart Check: “Trouble”

So earlier today in “To ‘Tantrum’ Or Not To ‘Tantrum’, That Is The Question,” I said the following about the juxtaposition between hedge funds’ big Treasury short and still long equity positioning: …if the highly anticipated repricing of yields higher turns out to be …err… higher-er–er than expected, the long equities side of this bet…

“JP Merlin” Returns: Quant Wizard Kolanovic Weighs In On Volatility, Geopolitics, And The Fed

He doesn’t have a long, white beard. He doesn’t wear a robe or a pointy hat. And he doesn’t walk with a gnarled, magic staff. But that doesn’t stop us from characterizing JPMorgan’s resident quant wizard Marko Kolanovic as a kind of Gandalf figure. Regular readers know Kolanovic. His star has risen over the past couple…

Here Comes The Next “Tantrum”

I’m always warning about VaR shocks. More specifically, I like to remind investors that in the event rates reprice sharply higher, the return correlation between stocks and bonds could well flip positive as equities interpret the sudden spike in yields as a risk-off event.  In short, that means stocks and bonds sell off together, leaving…

Heisenberg Challenge: To “Hedge” Or Not To “Hedge”

Submitted for your approval: an amusing comparison.