1/ Some random thoughts on the reflexive impacts of commoditization of access in finance…
In other words, “what happens when we make something easy to invest in?"
2/ In 1991, Goldman Sachs launched the Goldman Sachs Commodity Index (GSCI). By the early 2000s, commodity futures were an popular, emerging asset class for many financial institutions.
3/ Institutional investors were ravenous for exposure, and grew their exposure in different commodity index-related instruments from just $15b in 2003 to $200b by mid-2008.
4/ This raised some concern that price-insensitive buyers of commodities may cause unwarranted increases in prices and volatility.
- Greatly increasing price comovements between commodities after 2004
- In particular, non-energy names became more highly correlated with oil.
6/ They also found that,
"The trading of index investors can act as a channel to spill volatility from outside financial markets on and across commodity markets."
7/ But can commoditized access change the fundamental nature of the asset itself?
Erb, Harvey, and Viskanta (2020) discusses the growth of Gold ETFs and the shift of gold price sensitivity from real yield changes to supply-and-demand shifts.
8/ So what else has been commoditized?
Target Date Funds have grown from $8 billion in 2000 to $2.3 trillion in 2019.
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).