A snippet from a Nomura note following Monday's sell-off
we think it is unlikely that algorithmic investors (trend-following algos such as CTAs and risk-parity funds) are the main culprits behind the selloff.
- algos appear instead to have been forced to adjust their positions … likely ended up accentuating the drop in share prices and the rise in bond prices
the main trigger seems to have been human decisions and nontechnical factors
- The most straightforward interpretation of these changes in speculative supply and demand is that investors probably stepped up their moves to factor in irregular deterioration in fundamentals. They may be reacting in particular to the risk that the COVID-19 outbreak, which had been thought likely to have only a momentary depressive effect on the economy, could in fact trigger a global economic collapse. We get the impression that a wide range of investors are now factoring in a previously unthinkable scenario.
If even the long/short funds were to shift toward cautious stances, we see a risk that this bearish contagion could infect the entire hedge fund population.
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Ugly stuff.
ps. Free charts here
