How are systematic strategies affecting equities today?
As far as I can tell, many are dead pressure at the moment.
e.g. Here’s a dashboard I whipped up of S&P 500 allocation sensitivity in one popular multi-asset momentum index.
(Definitions 👇)
(Yes, I am bastardizing the greeks here)
Gamma - Change in weight per 1% move in spot price
Vanna - Change in weight per 1% move in realized vol
Charm - Change in weight per 1 day change in historical data window
DlambdaDvol - Change in portfolio leverage required to maintain constant volatility target per 1% change in realized volatility
Note the difference between FEB and OCT. There was so much equity exposure in FEB, changes in spot or realized volatility would lead to meaningful de-risking (not to mention just the burn from charm).
Not quite the same today.
I’m seeing a similar pattern across CTAs, Risk Parity, etc.
That isn’t to say markets can’t go down. Just that an exogenous shock won’t lead to a lot of systematic selling pressure, as far as I measure it.
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1/ Having lots of fun convos in the DM’s about positioning of systematic players (and how that positioning changes w.r.t. spot, realized volatility, and time).
I think an important equation to keep in mind is:
dL/dV = -T / V^2
2/ If we assume leverage (L) is simply equal to target volatility (T) divided by realized volatility (V) (i.e. L = T / V), then we find that the change in leverage w.r.t changes in volatility is equal to the equation above.
3/ What does this mean?
Since T is pretty much constant, it tells us that leverage changes (i.e. buying / selling pressure) will be due to changes in realized volatility (duh).
1/ A few random thoughts on the idea of a "stock picker's market"...
Below I plot two long/short value strategies. Both use a composite set of measures, rebalance monthly, and buy the top quintile / short the bottom quintile.
But one peaks in 2013 and the other 2017.
2/ The only difference? One is market-cap weighted and one is equal-weighted.
Now consider this graph that shows a long/short portfolio that is equal-weight the top 10 stocks by market cap and short the bottom 990 (R1K proxy universe).
3/ Not surprisingly, many of these "top 10" stocks find themselves in the bottom decile of value.
And when we market-cap weight our legs, we end up with significant short exposure to them.
Equal-weight still shorts them, but doesn't do so in an out-sized manner.
1/ I feel like factor volatility has shot through the roof in 2020 and nobody is really talking much about it.
(I get it, there are more important things going on.)
2/ It isn’t unusual to see factor volatility jump in a crisis, but what is sort of weird about 2020 is that we’ve seen a bigger-than-usual jump in all the factors simultaneously.
3/ Let’s talk about June for a second.
Within a week, value was up 10% and momentum was -20%. A WEEK.
And look how almost completely mirrored these factors have become.