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$140 Billion Influx from Quants is Warning Sign for this Equity Chief

Apr 10, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
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  • A surge of computer-driven buying worth as much as USD$140bn could be poised to hit US and European equity markets as soon as this month, according to an interview with Heron Asset Management Chief Alberto Tocchio by Bloomberg. While many would interpret the inflows from quants as bullish confirmation of an upward trend in US and European equities, Tocchio takes a contrarian view and is interpreting the inflows as ultimately bearish.  
     
  • According to Tocchio’s point of view, CTAs (Commodity Trading Advisors) and retail investors enter markets at the very end of a rally during the final melt-up phase. As a side note for our readers, CTAs trade derivative instruments such as futures, options, and swaps mostly using quantitative and computer-driven strategies.
     
  • Tocchio is drawing caution from the belief that these funds currently have too much cash to put to work. As can be seen in the chart below, the SG CTA Index is currently near its highest level since October 2018.
 
CTAs HSG CTA Index and S&P 500 Index since September 2018 and Beta of S&P Index
 
 
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  • Tocchio believes that USD$140bn of inflows into US and European equities paired with poor liquidity will power stocks into a robust short-term rally. This rally, however, will quickly move into overbought territory. Against a backdrop of weak global growth, the rally will deflate as quickly as it started, potentially sending stocks lower than prior levels.
     
  • Already Tocchio has reduced the equity exposure of his USD$2.5bn AUM Swiss family office down from 130% to 55% as a result of his valuation and recession fears. If the future inflow from CTAs and volatility-targeting funds are at the high end of his forecast, however, he may reduce equity exposure to as little as 10% within the next month.  
     
  • Tocchio explained that he will buy options on major stock indexes in order to hedge a downturn. Every day at Quantamize, we publish options trades to help investors capture elusive returns. If you are interested in introducing options trades that return more than 160% on average into your portfolio, check out our FREE Options Dashboard here.

 

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