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Risk parity fund unwind tipping point
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Risk parity fund unwind tipping point

  #81 (permalink)
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And this should increase the bid for Bitcoin at the same time.

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  #82 (permalink)
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Risk parity yet to adjust leverage

The article is primarily B of A report about large sigma moves.
Most of it I don't really understand but the link is at the end for those who are interested.

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http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/07/05/qq%20CTAs.jpg


Driven by the decoupling between stocks and bonds and the volatile, countertrend move in commodities and oil in particular - which was nowhere more evident than in the world of Risk-Parity funds and CTA, which suffered their worst two-week plunge since 2003.

For the answer we go to one of the foremost vol experts on Wall Street, the team of Chintan Kotecha, Ben Bowler et al at Bank of America, who today described what took place last week “Quant quake”, and who continues a long trend of pointing out just how "weird" and fragile the market is (no really, in late May he wrote "While not obvious on the surface, these Markets Are Very Weird") by noting that markets continue to set long-term records for price instability or “fragility”, with a five standard deviation (5-sigma) sell-off in the S&P 500 on 17-May, a 3-sigma drop in the Nasdaq 100 on 9-Jun, and most recently a sharp rise in the bank's cross-asset Fragility Indicator.

However, while price trends and vols indicate CTAs may have unwound Fixed Income and Commodity positions, according to BofA risk parity portfolios have yet to adjust their leverage. In other words, despite the volatile market gyrations, risk-par did not deleverage. For risk parity, it is important to distinguish between changes arising from slower-moving shifts in cross-asset allocation versus dynamic adjustments in leverage due to target volatility overlays. Typically the larger and more significant deleveraging comes from vol control overlays. The amount of deleveraging is a function of a risk parity strategy’s target volatility and maximum leverage allowed. But more significantly, the deleveraging is a function of the prevailing volatility prior to a large move and the specific magnitude of those large moves.

source:
"Quant Quake": What Was Behind Last Week's Historic CTA Crash, And Is Another One Imminent | Zero Hedge

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  #83 (permalink)
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Along similar lines is this must-read piece from Harley Bassman:

http://www.convexitymaven.com/images/Convexity_Maven_-_Rambling_near_the_Edge.pdf

Seemed appropriate for this thread, in that it actually seeks to answer the question of the risk-parity unwind tipping point.

To those not familiar with the concept of "negative convexity" it's a term most often associated with mortgage backed securities where the investor is short the refi option, which slows the rate of price appreciation of the bond when interest rates decline (as borrowers refinance and the MBS investor is repaid early at par) and increases the rate of price declines when interest rates rise (as mortgage borrowers reduce their rate of pre/repayment, leaving the MBS investor stuck with a longer duration security at the worst possible time.)

A similar concept can be applied to risk-parity and other volatility-conditional investment constructs, where portfolios are essentially forced to buy high and sell low.

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  #84 (permalink)
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Bladesmith View Post
Along similar lines is this must-read piece from Harley Bassman:

A similar concept can be applied to risk-parity and other volatility-conditional investment constructs, where portfolios are essentially forced to buy high and sell low.

Thanks for the article!

Re:
In simple terms, would you prefer to buy an asset (strategy) with a 15% return and a
30% Vol (IR = 0.5), or a 5.1% return asset with a 3.4% Vol (IR = 1.5)? Seemingly the latter
is better, especially if we lever it 3x to a 15.3% return (with a lower volatility). But this is
somewhat similar to selling a deep OTM put; usually a winner, until it isn’t.

1. is 3.4% Vol mean percentage change in price on a daily basis - so 100 to 103.4 or to 0.957?
2. when levered 3x does the Vol of the investment go up 3x to 10.2?

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  #85 (permalink)
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sell off on quant note?

While nobody knows what catalyzed for the sharp selloff over the last hour, with Citi blaming it on Acrophobia, or fear of heights, saying that "US equities opened at record highs, key levels were being approached in fixed income while USD enjoyed a bid across the board... However since then, it looks like markets have gotten a small case of cold feet", Bloomberg had a different idea, when it observed that stocks erased gains around 12:30 p.m. as S&P 500 fell 0.5% over 60 minutes to low of 2,469.51. It notes that the "weakness occurred as traders circulated a note by JPMorgan quant strategist Marko Kolanovic that cautioned investors on the risks of record-low volatility in the equity market."

In his latest note, reposted below, Kolanovic, aka the JPM quant "Gandalf" popularized on this website over the past two years writes that "volatility near or at record lows by a handful of measures should “give pause to equity managers,” and that “low volatility would not be a problem if not for strategies that increase leverage when volatility declines.”


which MS explained what would happen if VIX went "bananas", Kolanovic writes that "strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance’ of 1987,” which “creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.”

"We May Be Very Close To The Turning Point": Selloff Blamed On This Note From JPM's Marko Kolanovic | Zero Hedge


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Last edited by aquarian1; July 27th, 2017 at 05:10 PM.
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  #86 (permalink)
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Negative convexity:

“How did you go bankrupt?"
Two ways. Gradually, then suddenly.”

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  #87 (permalink)
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US Gvt buys 10% dip as expected on Tuesday

Today US Govt bought up the dip after opening as < 2583 is 10% so with 256.98 in pre-open they bought at open.
(This is in regards to last sentence below.)

clippings from article:

"While CTAs have the potential to continue selling via turning short, we believe the risk to that is low as CTAs often use moving average crosses to determine long and short positions. While specific parametrizations can vary tremendously across CTAs, in our opinion an important combination worth monitoring is both the 1M vs. 3M and 1M vs. 10M moving average crosses. Given the strong rally in equities over the last year and longer, the 1M moving average still remains well above the 10M and we do not believe shorts build up until we see that set cross.

However, speaking of CTAs, there is another potential major risk factor: a sudden spike lower in Treasury yields. Recall our article from January 24 "Momentum Traders Wreak Havoc For 2Y Treasurys, Could Unleash Sharp Bond Liquidation" in which we explained that some of the biggest marginal buyers, and sellers, of 2Y notes are CTAs.
----------
In other words, if only central banks provide just enough support to stocks today, we may all simply forget that on "Black Monday 2017" (2018?) we saw the biggest volatility freakout in history and the algos will be back to buying the dip, as they always have been, in no time as nobody learns any lessons once again."

source:
https://www.zerohedge.com/news/2018-02-06/was-just-start-risk-parity-ctas-are-process-selling-200-billion-equities

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  #88 (permalink)
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from Anthony Crudele
2 Feb 2108

Yesterday on Periscope I spoke about the action I was seeing in the Bond/Treasury Market and the S&P (ES). With yesterdays weakness in the ES we did not see a bid come into the Bond/Treasury market. I actually saw the opposite as they were all trading weak together. If you look at the chart below you can see the 30 yr, ES & 10 yr have been moving together over the past 5 days.

In my opinion this type of action could be a problem for the Stock Market. There is a ton of money invested in this Risk Parity trade and even a small amount of unwinding of this trade could result in big moves for both Equities and Treasuries to the downside.

I use a strategy that dictates my trading so noticing this action in Bonds/Treasuries & ES is only a warning sign, not a reason to be short ES.

Which brings me to my ES strategy chart. Today’s close is very important to me. A daily close below 2835 indicates a possible test of 2768 in the coming days/weeks. Two ways I typically execute this type of trade. One way is using options and the other way is day trading futures using shorter term charts to look for short opportunities. Typically when I have a daily signal for direction I only trade that direction until the daily chart changes. That means I will only look at shorts until the target of 2768 hits or we get a daily close back above 2835. If we close today above 2835 then all bets are off for me looking short & I think that we continue to grind higher.

With the look that I am seeing between ES & Bonds/Treasuries I will use that as confirmation when executing. If Bonds/Treasuries are going down with ES I will look to be more aggressive with shorting ES. If Bonds/Treasuries are not going down with ES, then that correlation I noticed is breaking down & will no longer use it for confirmation.

source:
A Warning Sign For S&P - FuturesRadioShow

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Last edited by aquarian1; March 24th, 2018 at 01:44 PM.
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