Remember when last week JPM’s head quant Marko Kolanovic said there is little risk of the quants puking?
Well, he was wrong.
Here are some critical thoughts from Goldman’s strats team on levels and size of flow from the Passive community which gives an idea as to what has driven the sharp lower in the US over the past hour.
SYSTEMATIC FLOW UPDATE…
*our (GS systematic strategist) work suggest that the 2,735 level in the S&P is where trends could start to change, driving more aggressive selling from the CTA community. We estimate this community to be long approximately $70bn of US equities and $190bn globally coming into today. If negative price action continued or worsened, we think getting flat (i.e. $190bn of global sales) in a month is reasonable
The difference between Risk Parity and CTAs:
- Risk parity and CTAs (managed futures funds) are not synonymous: Risk parity is a long-only strategy with negatively correlated assets that is sensitive to volatility spikes in the market and positive bond/equity correlation; managed futures funds (CTAs) are long/short strategy funds aimed at capturing trends in the market (in either direction)
- The conditions that could lead to forced-model selling impact CTA behavior only such that wide spread selling will generate a downward trend
- Since CTAs look to capture trends in the market, they are likely to apply additional downward pressure on markets if forced-model selling occurs
- Additional pressure from CTAs may further exacerbate the sell-off from risk parity funds
More details from Goldman’s systematic strategist Paul Leyzerovich below…
Our baseline expectations are more firmly in sell mode for CTA trend followers
Coming into today, in a flat mkts scenario, we expect >$40bn (or >2x std dev in our work) of global eq sales from this community for the next 1w and >$80bn for the next 1m
- This is due to negative short-term trend in many markets, medium-trend changes in a few (particularly Europe and Canada) and some VaR de-risking from the higher volatility
We estimate this community to be long approximately $70bn of US equities and $190bn globally coming into today
- If negative price action continued or worsened, we think getting flat (i.e. $190bn of global sales) in a month is reasonable
- Conversely, if price action improved and bounced higher, the 1w sales would be smaller* and overall 1m activity could be net neutral, representing selling earlier and buying later in the month
The points above are encapsulated in the updated chart below
- Most of the expected sales represented by the baseline (dark) line are driven by non-US, though US smallcap is contributing with the Russell short-term area breached, and S&P is very close to its latest short-term area of 2,747 in our work**
Based on the starting point and moves so far, we expect CTA trend has been more relevant to flows than risk parity or insurance vol-control, though those communities are long as well (as are others and non-systematic)
* less than $30bn, depending on the size and speed of the bounce; generally still towards net sales of varying size in most 1w market scenarios
** pursuant to trend, the levels adjust with more time and mkt movements
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