Tuesday, 6 January 2015

2015 - The year of the whip for markets but also index funds.

One of the most notable things about 2014 was the demise of the macro funds at the expense of the index tracker. But 2015 feels as though it is going to be a game of many halves. As we saw towards the end of 2014 sector rotation was massive and though the performance of your long only general index may have not given you cause to think there was anything wrong with your investment decision paying minimal fees as all equities rallied, there was monstrous opportunity lost. Discretionary performance picked up into the year end just as long only indices started to put in shabby performance vs spectacular volatility. Plenty of this performance will have been currency related but when the index fund holder looks at their risk return vs discretionary they probably won't care as when the trends abate and the performance dwindles they will start looking for something a bit more creative.

So here are some calls for the fund market in 2015 -

 - Trends in equities and bonds will end. This is the year of the whip.

 - Though general equity indices will see a path of general sidewayness with high volatility there will be large sectoral oscillations.

 - Because of the above, funds will start to move from index trackers towards discretionary as the point above means that GOOD discretionary starts to perform.

 - Discretionary macro will find they are short of portfolio managers as they have mostly been replaced by quants who are absolutely brilliant at working out value in their space but unfortunately don’t have a clue as to how someone else’s space effects their space, especially if it hasn’t happened before.

 - Macro hedge funds that have sold their souls to pension funds and real money investors will feel like straight jacketed loons peering out at freedom from the confines of their asylum as the risk rules imposed upon them by their new masters of dull money mean that they can’t participate in the way they would really like to. Or stay in when under pressure.

 - Fast swings will seek out and eat at the edges of risk boundaries. Much as lions will take down the wilderbeast on the edge of the heard, funds that can’t move fast enough or are too restricted by process will under-perform as their positions are taken away from them in a steady stream of stop losses on both sides of the market.

All in all it's lining up to be a very whippy year.


Leftback said...

Yeah, this year will be Chop Suey. Those who are ponderous will be flogged and those who are nimble will crack the whip. It's never easy timing short entries, but you can probably bet on a vicious squeeze every month or two and if you catch 4 or 5 of them this year and then just sit on your hands the rest of the time you are going to do pretty well.

2015 is finally the year when the momo guys who can't think their way out of a paper bag are going to under-perform and the risk officers for US long only funds will be vomiting before lunchtime on a regular basis. This isn't even going to be that easy for US fixed income funds either, as we will finally see a slow reversal of capital flows that have driven the dollar to its lofty perch.

In past years where TLT has been first past the post (2008, 2011), among the standouts in the ensuing year have been EEM and US HY. This time it might be Europe. There are always going to be a few places for Yield Hogs to park, as well. We spent the whole year parked in REITs and lower grade munis and can't see anything capsizing those boats for now.

Anonymous said...

Schumpeter anyone for the process going on.. Paul Tudor Jones shuttering his Tudor Futures Fund because the costs of running it were out of kilter with the size. So you're damned if you do take boring money and damned if you don't....

Leftback said...

Also agree with Polemic that this might be a great year for the ABFA* portfolio, [*anything but f*cking America].

EM debt, Aussie banks and mining stocks, European banks, Russia, Brazilian utilities, Norway, Portugal. You name it. If it got pounded senseless in 2014, it is probably going to do relatively well, once the last dollar long to climb on board realizes everyone is on the same side of the boat.

The worst shall be first, and the meek shall inherit the capital. Eventually.

Anonymous said...

Check out the spec positions in EURUSD:


Anonymous said...

Spot on LB on ABFA, Wayne Gretzky would approve even though nowadays momo can slow down the time the puck takes to get to you and the crowd can be a pain too!

Polemic said...

Cheers LB and ANnon

I am now thinking that Europe could have some surprise relief from current discounted doom - see next post. And yes US is not the place I want to be long this year. Others will do better.