Monday, 5 October 2015

Pain in the hedge?

When I hear long term reasons for short term positions being rolled out as long term reasons for hopefully short term positions that finally have to turn into really long term bottom drawer compost heap trades (rotting through carry costs) on now very very long term views (Greece for example, hands up who is still short Europe because one day Greece is doomed) then I take the moves to be positional squeezes.

We hear lots about underweight equities in funds and how big PMs are hedged up to the eyeballs. Assuming that these massive hedges were on the back of the most recent China/slowdown/Fed etc theories then I presume they didn't put them on during the first four days of the August fall. Folks like to digest a monster dump before racing in with a hedge program. So that would imply that those hedges would be put on in the range we are now in for equities. Which would further imply that further climbs from here would mean those hedges are creating underperformance to the index. I don't know any equity manager who likes to be seen to underperform a simple passive index. *

VIX is a good indicator of hedge unwind activity. We are now sub 20 and with that in mind I would not be at all surprised to hear that most of this move higher is pain in the hedges. There is nothing worse than falling volatility and a counter directional underlying move to induce thorn bush, backward dragging, hedge pain. Well, apart from not believing the move and having to cut said hedges for pure money management rules. That's razor wire.

A 85,  90, make that a 95 point rally in SPX over the last 30hrs is garnering only a fraction of the comment a similar fall would, suggesting the longest river in the world is dominating the thought process. Denial.

It is interesting how a near 100pt rally in SPX over the last day and half can be dismissed as an understandable move,  yet to consider another 100pts higher for the rest of the week is considered sacrilegious and nigh on impossible as it would take us so near to the all time highs. But at current momentum the all time highs are only 3 days away. Absurd? Most likely, but let's get some symmetry into the assumed bear argument.

It also looks like M+A just keeps rolling along too. Never underestimate the power of a humongous heap of cash in the coffers, especially when cash has outperformed your stock and nearly every other asset recently. Fancy a bit o' sweet Symphony for an Alpha bet? (Verve verve voom).

Oh and thank heck for this rally as my FTSE long red hot poker has been replaced by FTSE long soothing balm. This is highest we have been since the August crash, even approaching July lows. Not bad for a commodity and EM laden index.

Or perhaps it was all on the back of the compulsory sale of 5p plastic bags by UK retailers. Got to be some inflation in that move.

*The old maxim - If you want a good hedge, go to a garden centre.


Talbakken said...

Pol - very much in agreement with you. One other thing to notice from Monday was that for the first time since the late August volatility erupted is that the VIX curve actually steepened (it has been inverted or flat pretty much every day since Aug 24th). Who knows what news flow we get in the coming days, but I would surprised if this curve did not continue to both steepen and decline in levels. We had a bit of a technical air pocket from 1,930 to current levels. But we should also expect some stiffer resistance at 2,050.

Polemic said...

Good point on the Vix curve steepening, thanks Talbakken.