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Top PMs weigh turbulence and 'machine' haters

Top PMs weigh turbulence and 'machine' haters

Portfolio manager Jeffrey Gundlach has cautioned that the return of volatility, seen in the last few days, is unlikely to go away any time soon.

Having stayed stubbornly low for over two years, volatility returned to the market this week. The Cboe Volatility index (VIX) spiked at almost 50 early Tuesday morning, before dropping off to finish the day at around 37. Over Wednesday it retreated to end the day at 25, on Thursday it peaked at almost 36, before a brief fall and has climbed to 38 today.

In a tweet, the DoubleLine Capital chief executive said: ‘Low yields/low vol paradigm went on so long and became so heavily invested in that now the unwind will be turbulent and not just a few days.’

US stocks rebounded slightly this morning but then slid and are expected to end a tumultuous week with their worst five-day performance since October 2008.

The S&P 500 index slid 1.32% or 34.01 points to 2,546.47, the Dow Jones Industrial Average was down 1.55% or 369.98 points to 23,490.48, while the Nasdaq Composite dropped 1.38% or 96.50 points to 6,683.48 in mid-day Friday trading.

The sudden spike in the VIX has caused many products that bet on low volatility to suspend trading or shut to investors.

While the troubles for such strategies have become one of the main stories of this week’s market, another has been the role of trading algorithms and risk parity strategies, the latter of which tend to limit allocations to more volatile assets such as stocks and commodities while loading up on safer assets such as government bonds.

Cliff Asness, co-founder and chief investment officer of AQR Capital Management, which is known for its risk parity funds, said in a February 7 blog post that such comments were ‘poppycock.’

Asness wrote that it was ‘not unreasonable’ to think that risk parity strategies tend to sell into the higher market volatility that often coincides with market losses, but the size of these funds mattered.

‘To make a statement about this you have to have a vague idea about how many dollars are in such strategies and what they are likely to sell in a down draft,’ wrote Asness.

‘You may notice a conspicuous lack of relevant estimates from the many “machine” haters. This isn’t surprising because the facts show “the machines” can’t possibly be the culprit.’

You can read his full post here.

While the market correction in the past week has dealt a blow to many funds, not every one has lost out.

The US-domiciled $319.3 million Hussman Strategic Growth fund has advanced 5.24% over the past week.

John Hussman, the fund’s manager, who has held a bearish stance towards the S&P 500 in recent years, agreed with Asness’s assessment that machines did not cause the sell-off.

‘When a dentist in Poughkeepsie sells an index fund, the fund company doesn't hand a human trader 500 sell tickets and a phone. It sells a basket or a future. Yes, “machines” execute and arb stocks vs futures, but it's still the dentist's sell order, and *someone* has to buy it,’ Hussman tweeted on February 6.

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