Quant Fire Only Half Out to JPMorgan Strategist Who Saw Rout

Updated on
  • Kolanovic says selling by trend followers still happening
  • `Expect elevated volatility and downside price risk' to last

Robotic selling by quantitative investment funds tuned to volatility and price trends contributed to last month’s losses in U.S. stocks and is only about halfway completed, according to a JPMorgan Chase & Co. strategist.

Traders employing trend-following strategies in futures and those who use an asset-balancing technique known as risk parity probably have to get rid of another $100 billion in stocks in the next one to three weeks, wrote Marko Kolanovic in a note Thursday to clients. While down from an estimate of as much as $300 billion in research published a week ago, the derivatives strategist said investors shouldn’t consider the risk as having passed.

“There is a lot of money that moves in and out of the market on technical and quant type of models,’’ said Rick Bensignor, chief market strategist RF Lafferty & Co. in New York. “The Street has gotten much more to a mathematically oriented way of looking at things. Look how often the S&P 500 can move 10 to 15 points in 15 minutes. That’s why there is far more attention being paid to them.’’

Computerized traders whose behavior is triggered by market signals like volatility or price trends rather than earnings or the economy have gotten extra attention since stocks began their biggest swoon in four years last month. Kolanovic predicted on Aug. 21 that quantitative funds had the potential to exacerbate swings in equities after the S&P 500 broke below a trading band that had held for most of the year.

Kolanovic’s research has not been universally accepted by the Wall Street quant community. Kokou Agbo-Bloua, a strategist at Societe Generale SA, said in an interview with Bloomberg on Aug. 28 that warnings computerized investors could trigger crashes put too little emphasis on precautions the funds take to limit their own impact.

In his most recent note, Kolanovic revisited holdings by three of the biggest “price insensitive” categories of traders: those that adjust their positions according to preset volatility levels, trend-following traders, and pools employing the risk parity methodology.

While selling by the first is “largely out of the way,” trend followers and risk-parity users have more to do, Kolanovic wrote: as much as $60 billion for the former and the rest of the forecast related to the latter.

“We expect elevated volatility and downside price risk to persist,” Kolanovic wrote. “In our view, the risk/reward for equity investors remains in favor of waiting, rather than being fully invested until there is more clarity from macro data and central banks.”