asset managers – Page 3

Tourists caught on the wrong side of the volatility trade?

December 22, 2014 Tracy Alloway Comments 1 comment

We know that banks and hedge funds a traditional sellers of volatility. But low interest rates and somnambulant markets have also encouraged asset managers (or “tourists” as the banks and hedgies sometimes call them) to take up the strategy as they seek to juice their returns. It seems … risky.

This story has a lot of stuff in it, including a smallish dive into the events of October 15.

Long the domain of professional speculators like big banks and hedge funds, “selling volatility” — as such wagers are known — became one of the most popular trades of the year as a much wider range of investors piled into bets that asset prices would remain stable.

Now, as the prospect of the Federal Reserve raising interest rates draws increasingly near, the concern is that market volatility will return with a bang in 2015 and those investors caught on the wrong side of the revival will suffer badly.

“Volatility is a zero-sum game — for every buyer there is a seller. But what has changed is the type of sellers,” says Maneesh Deshpande at Barclays.

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Caught on the wrong side of the ‘vol’ trade

New column – Won’t somebody please think of the bond funds?

November 24, 2014 Tracy Alloway Comments 0 Comment

Bond inventories held by dealer-banks have halved since 2007 blah blah blah.

What gets far less attention than bank balance sheets in the bond market liquidity puzzle is the other side of the equation, and that is the astounding growth of bond funds.

This column, based on a big BIS paper, has some big numbers to go along with it.

The BIS estimates that the bond holdings of the 20 biggest asset managers have jumped by $4tn in the four years immediately following the crisis. By 2012 the top 20 managers held more than 60 per cent of the assets under management of the 300 biggest bayside firms in 2012, up from 50 per cent in 2002.

In other words, while asset managers are increasingly concentrated in bonds, the asset management industry, in turn, appears to be increasingly dominated by a select group of elite managers.

… The issue of decreasing levels of liquidity in the bond market was recently highlighted by the Bank for International Settlements, better known as the central bank’s bank, which last week released a 57-page paper with the rather dry title of “Market-making and proprietary trading: industry trends, drivers and policy implications”.

Yet the dearth of traditional market makers is only one half of the liquidity story.
The other is the astounding growth of big bond funds, which in recent years have ridden a wave of low interest rates and a period of huge debt issuance by governments and companies to grow their balance sheets by staggering amounts.

Many of these funds have been herded into similar investment positions thanks to the increasing use of benchmarking, as well as ultra low interest rates, which have essentially encouraged them to “go long” on credit. Moreover, in an environment of one-sided demand for bonds, few fund managers have had to pay for their liquidity in recent years.

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Liquidity puzzle lurks within bond funds’ extraordinary rise

October 15. A financial markets whodunnit.

November 17, 2014 Tracy Alloway Comments 0 Comment

On October 15, prices of US government bonds – one of the most liquid markets in the world – whipsawed violently and sparked a wave of speculation on Wall Street as to the culprit(s) behind the wild moves.

Here’s a longish analysis of what happened. The key suspects: lack of liquidity, the rise of electronic trading, a classic gamma trap (possibly sparked by the scuppering of the AbbVie/Shire deal) and much, much more.

… On October 15, the yield on the benchmark 10-year US government bond, which moves inversely to price, plunged 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent. While that may not seem like much, analysts say the move was seven standard deviations away from its intraday norm – meaning it might be expected to occur once every 1.6bn years.

For several minutes, Wall Street stood still as traders watched their screens in disbelief. Electronic pricing machines, which now play a bigger role than ever in the trading of Treasuries, were halted and orders cancelled by nervous dealers as prices see-sawed.

The events have sparked a financial “whodunnit” as investors, traders and regulators seek to understand what happened – and to determine whether October 15 was a unique event or a harbinger of further perilous trading conditions to come.

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Bonds: Anatomy of a market meltdown

Reading list – Business adventures: 12 classic tales from the world of Wall Street

November 6, 2014 Tracy Alloway Comments 0 Comment

So apparently everyone who is anyone has already read this book. Except me. It’s been sitting on my Kindle for months – untouched and unloved until very recently. But having started on this compendium of 1960s New Yorker articles just last week, I am now about a third of the way into it and all I can say is that this is the way business writing should be – full of fascinating and powerful narratives that tell you something about human behaviour as much as finance and markets and corporate intrigue. Oh, and the prose is to die for. You know, if that’s your thing.

Given recent events, one passage in the first chapter of the book struck me as particularly prescient.

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The slow drip liquidity story – updated

July 23, 2014 Tracy Alloway Comments 0 Comment

Updated: October 17, 2014 given recent market events and sudden interest in all things liquidity-related. To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns.

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A by-no-means-extensive list of my work on the changing structure of the bond market.

Goldman eyes electronic bond trading (March, 2012)

Finance: Grinding to a halt (June, 2012)

Dealer and investor talks over liquidity fears (June, 2012)

Goldman launches bond trading platform (June, 2012)

Bond trading model shows signs of stress (October, 2012)

Banks tout idea of sharing bond data (November, 2012)

Slow-drip bond sell-off masks a problem (November, 2012)

Markets on edge as investors seek exit (June, 2013)

ETFs under scrutiny in markets turbulence (June, 2013)

Markets: the debt penalty (September, 2013)