Quants Fire Back at Paul Tudor Jones After His Attack on Risk Parity
Message 31280050
April 21, 2017, 1:20 PM EDT April 21, 2017, 4:13 PM EDT
By Dani Burger
Paul Tudor Jones says automated trading strategies are poised to blow up the market when volatility returns. That’s not going over well at one of the biggest quant shops on Wall Street.
Speaking at a closed-door Goldman Sachs Asset Management conference earlier this month, the billionaire hedge fund investor said that a portfolio strategy known as risk parity will eventually act as “the hammer on the downside” when turmoil returns to equity markets.
For AQR Capital Management LLC, a giant in the risk parity field, the concerns are overblown, with any selling forced by the strategy having an “utterly trivial” impact on the $23 trillion U.S. equity market.
“There are scenarios in which risk parity funds sell equities, but the possible magnitude of that is very small,” said Michael Mendelson, a risk-parity portfolio manager at AQR.“Some reports have grossly exaggerated the potential impact.”
Jones, who oversees $10 billion in his Greenwich, Connecticut-based Tudor Investmenthedge fund, is the latest active asset manager to whip up fears surrounding the automated strategies that were a favorite target of bank researchers during the selloffs in August 2015 and early 2016. The strategy has less than $150 billion invested in it, according to data provider eVestment, most of at AQR and Bridgewater Associates’ All Weather Fund.
That’s significantly lower than the roughly $500 billion that some have estimated. And of that total, only around a third is investing in equities, Mendelson said. That compares to the nearly $2 trillion in market value that evaporated from U.S. equities during the last stock market correction.
“Even on a sharp move in the stock market, the positioning changes would be utterly trivial and would have about zero impact,” Mendelson said.
A spokesman for Paul Tudor Jones did not immediately respond to an email request seeking comment.
Cash FleeingRisk parity bases its allocations to different asset classes on risk rather than capital, as in the typical 60-40 stock-bond fund. So, for example, U.S. Treasures and international government bonds often play a larger role in risk parity funds than in other asset pools, while stocks usually take up a smaller slice.
In addition, money has fled risk parity funds in seven of the past nine quarters, for net outflows of more than $16 billion among funds tracked by eVestment.
But even in the scenario that Jones lays out, the funds wouldn’t dump their stock holdings for a variety of reasons, according to Edward Qian, who’s credited with coining the term risk parity. Because of the safer asset concentration, the strategy performs relatively better when stocks tumble and wouldn’t need to sell as much as a traditional 60-40 portfolio, Qian said.
“They’re always focused on the equity portion of risk parity, saying that equities might have a terrible time and other scary fear mongering things,” Qian said. “Even if someone has a stop loss or equity reduction program, it can’t be a significant player in those time periods.”
Pointing FingersTake August 2015, when JPMorgan Chase & Co. analyst Marko Kolanovic shot to fame after attributing the correction in the S&P 500 Index to automated selling from quant funds such as risk parity.
However, while the main equity gauge tumbled 11 percent in just five days, a risk parity strategy fell just half as much, as tracked by the Salient Risk Parity index. Not only did managers just sell a portion of their exposure, they didn’t all sell at once, AQR saidat the time.
It’s true that under the risk parity framework most programs gobble up equities when volatility subsides. However, Qian says that stock holdings in his fund and others likely are hovering near their average levels, since they use multi-year measurements to calculate riskiness. Mendelson believes the funds may be reducing their equity exposure to keep up with their diversification models. And because their time horizon is long, it’ll take more than a few days of volatility to prompt selling, Qian said.
Still, the quants don’t expect the finger pointing to stop.
“First you had Leon Cooperman and now it’s a hedge fund guy,” said Qian. “Any time performance isn’t doing well, they just blame risk parity.”
http://www.bloomberg.com/news/articles/2017-04-21/paul-tudor-jones-sets-off-latest-feud-with-quants-on-risk-parity
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Paul Tudor Jones Says U.S. Stocks Should ‘Terrify’ Janet Yellen
By Katherine Burton and Katia Porzecanski
April 20, 2017, 7:00 PM EDT April 21, 2017, 12:56 PM EDT
Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid.
The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure -- the value of the stock market relative to the size of the economy -- should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him.
Jones is voicing what many hedge fund and other money managers are privately warning investors: Stocks are trading at unsustainable levels. A few traders are more explicit, predicting a sizable market tumble by the end of the year.
Last week, Guggenheim Partner’s Scott Minerd said he expected a “significant correction” this summer or early fall. (EDITORIAL comment from JJP: Haven't we all been expecting this market which is in the process of breaking down in the most serious and major fashion..... the way that FB plummeted and sliced through it's 50 dma... like a knife through hot button... shows the weakness and the bears and the put buyers have gone away............... no one is left to buy the bounces...AAPL iphone 8 is trash and the stock is getting sold massively, AMZN made it's high at the end of July is and almost back to it's 200 dma. GOGGL, peaked on June 4 and has been trading in a sideways range which it is threatening to break down out of .... not far for it's 200 dma. The SMH looks like it has topped and was down 2% today.... PQNI the nasdaq internet EFT is a great short right now, as is CWEB teh CSI CHina internet index 2x bull shares.
the KWEB is another good short..... china internet fund.the BIS -- Biotech short fund looks like a buy.
Global C Lithium was down 3.06% today
Guggenheim solar was down 4.66% today
the SMH was down 1.92% and these bad boys are just gathering steam.... end of JJP editorial comment )
Philip Yang, a macro manager who has run Willowbridge Associates since 1988, sees a stock plunge of between 20 and 40 percent, according to people familiar with his thinking.
Even Larry Fink, whose BlackRock Inc. oversees $5.4 trillion mostly betting on rising markets, acknowledged this week that stocks could fall between 5 and 10 percent if corporate earnings disappoint.
Caution FlagsTheir views aren’t widespread. They’ve seen the carnage suffered by a few money managers who have been waving caution flags for awhile now, as the eight-year equity rally marched on.
But the nervousness feels a bit more urgent now. U.S. stocks sit 2 percent below the all-time high set on March 1. The S&P 500 index is trading at about 22 times earnings, the highest multiple in almost a decade, goosed by a post-election surge.
Managers expecting the worst each have a pet harbinger of doom. Seth Klarman, who runs the $30 billion Baupost Group, told investors in a letter last week that corporate insiders have been heavy sellers of their company shares. To him, that’s “a sign that those who know their companies the best believe valuations have become full or excessive.”
Share sales by insiders outstripped purchases by $38 billion in the first quarter, the most since 2013, according to The Washington Service, a provider of data and analysis on insider trading.
Klarman also noted that margin debt -- the money clients borrow from their brokers to purchase shares -- hit a record $528 billion in February, a signal to some that enthusiasm for stocks may be overheating. Baupost was a small net seller in the first quarter, according to the letter.
Another multi-billion-dollar hedge fund manager, who asked not to be named, said that rising interest rates in the U.S. mean fewer companies will be able to borrow money to pay dividends and buy back shares. About 30 percent of the jump in the S&P 500 between the third quarter of 2009 and the end of last year was fueled by buybacks, according to data compiled by Bloomberg Intelligence. The manager says he has been shorting the market, expecting as much as a 10 percent correction in U.S. equities this year.
China SlowdownOther worried investors, like Guggenheim’s Minerd, cite as potential triggers President Donald Trump’s struggle to enact policies, including a tax overhaul, as well as geopolitical risks.
Yang’s prediction of a dive rests on things like a severe slowdown in China or a greater-than-expected rise in inflation that could lead to bigger rate hikes, people said. Yang didn’t return calls and emails seeking a comment.
Even billionaire Leon Cooperman -- long a stock bull -- wrote to investors in his Omega Advisors that he thinks U.S. shares might stand still until August or September, in part because of flagging confidence in the so-called Trump reflation trade. But, they’ll eventually resume their climb and end the year moderately higher, he and vice chairman Steven Einhorn wrote in the letter.
When asked Friday about Jones’s comments, Fed Vice Chairman Stanley Fischer told CNBC, “There are lots of things that terrify me -- stock market volatility of the magnitude that we’ve seen for the last couple of years doesn’t,” without addressing valuations. “Of course we’ll watch very closely and if we see excess volatility, wonder what is behind it and whether there are structural features that need fixing or whether it’s simply recent events or even policy actions.”
Likely Culprit
While Jones, who runs the $10 billion Tudor Investment hedge fund, is spooked, he says it’s not quite time to short. He predicts that the Nasdaq, which has already rallied almost 10 percent this year, could edge higher if nationalist candidate Marine Le Pen loses France’s presidential election next month as expected. Jones tripled his money in 1987 in large part by correctly calling that October’s market crash.
While the billionaire didn’t say when a market turn might come, or what the magnitude of the fall might be, he did pinpoint a likely culprit.
Just as portfolio insurance caused the 1987 rout, he says, the new danger zone is the half-trillion dollars in risk parity funds. These funds aim to systematically spread risk equally across different asset classes by putting more money in lower volatility securities and less in those whose prices move more dramatically.
Because risk-parity funds have been scooping up equities of late as volatility hit historic lows, some market participants, Jones included, believe they’ll be forced to dump them quickly in a stock tumble, exacerbating any decline.
“Risk parity,” Jones told the Goldman audience, “will be the hammer on the downside.”
bloomberg.com
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Bottom Line: we have been waiting for the CORRECT TIME as Calculated by the WD GANN parameters and the parameters of Geocosmic signatures of Magnitude........... as I have been saying since last year that roll over period would be in the late summer heading into Autumn.... It was most appropriate that this thread hit it's 20,000th post ...The first Day of Rosh Hashanah and just before the Autumnal Equinox at 4:02 pm last Friday Sept 22nd......... the Equinox was nice enough to wait for the market to close to give the futures traders an early jump on the action to the downside sunday evening.
JJP |
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