 Q4 the idea of hedging any positioning seemed nonsensical. Any option - ing. VIX open interest, where the modern man goes to do his hedging, was very low (like in January 2018) with SPX put interest also very weak, and then ‘emptied’ by the September expiry. If the equity market were to fall, which of course it did, there was little hedging to protect it. It was not dissimilar to how it shows now.


With such a bad year behind them, hedge funds and their like are now not piling into derivative markets to hedge, in the same way as in  where 30 day historic volume is in the high 20’s. There is little demand for expensive options. They simply do not have the 2018 performance numbers to justify anything apart from an out and out bet.


- ously, has been the behaviour of the retail investor. He has headed for the door. So far, we have not seen much sign of him returning. This is of paramount importance. Since 2016, the benign nature of all markets has seen the last vestiges of retail investors joining the parties belatedly but buying the dips. These are the more cautious souls who have simply been forced in a last gasp TINA: they know they did not want to buy anything, they just had to. They knew it was wrong. For that reason they are quicker to cut and run and less likely to pile straight back in.


The hedge fund investor is the opposite. He has done okay since the GFC started ten years ago. A lot of hedge fund people, are seriously thinking they will retire if and when the music stops this time. There is no point in simply doing nothing. Make more money or call it a day. (I know this, they have told me).


So immediately the recent December/January rally started, the CTA investor immediately moved ‘back in’ to try to restore exactly the same distribution of positioning they had previously. The computers are always quick to smell trend and momentum and because of them every move, up or down, carries on for longer than one would imagine. They followed in closely behind.


Chart 4


In the same way that the market unwind through neutralisation had to be monitored with fundamental  occur because of overzealous positioning and the 


It is entirely feasible that bond yields are way too cheap but central banks predominantly remain buy- ers of bonds everywhere in the world apart from the US. The Fed were quicker to stop their own QE than anyone else dared. The ECB admittedly have started the process.


As asset classes rose over the last decade, when  had showing, valuations became extreme. How many references to QE does one read now?  Previously anything this dynamic has created much larger volatility.


So as bonds rallied and yields fell, the market had to   and as the retail investor sold those indexed ETFs, more money from those sales went into the treasury market.


Suddenly 3% on a 10 year treasury looked really gen- erous, especially when compared to an S&P yield way below that. The culprit, according to the markets, was  falling from 2.1% to 1.7%.


The market was happy with this assessment be- cause it meant the Fed would have to stop raising rates and if they did that, risk yielding assets could be bought once more.


If the economy was cited as a reason, we had simply become way too bullish in H2 2017 and Q1 2018. Suddenly the numbers were not beating.


The US bond markets concern turned towards a  as the market had predicted (plus ca change) and the beastly Fed kept insisting on raising rates.


 meant within the present liquidity distorted markets but it certainly wasn’t healthy on any historic meas- ure.


Source: Bloomberg


What it actually meant was the short end had to  the long end had to represent a lot of buying back from the ludicrously large short position.(All charts are sourced from Bloomberg)


Andy Ash E: andy.ash@admisi.com


6 | ADMISI - The Ghost In The Machine | January/February 2019


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36