Here's Why It's Been So Tough for Some Multi-Asset Investors

Searchlight Capital's Zinterhofer Says Volatility Has Created Opportunities

It’s been a difficult time for the likes of risk-parity investors and commodity trading advisers in the past week -- and a glance at the charts indicates just how much.

Take a look, for instance, at the correlation between the S&P 500 Index and the Bloomberg Commodity Index: it’s advanced to the highest level in about 10 months.

Rates have also been moving in line with equities more in recent days.

That’s all added up to a very tough time for some systematic strategies. The Salient Risk-Parity Index suffered its worst weekly loss since June 2013, while a Societe Generale index tracking commodity trading advisers had its worst week on record.

READ: Mom and Pop Keep Risk-Parity Afloat Amid Selloff -- for Now

“A simultaneous selloff of equities, bonds and commodities is the worst possible backdrop for multi-asset investors such as risk parity and balanced mutual funds,” JPMorgan Chase & Co. strategists led by Nikolaos Panigirtzoglou wrote in a note on Friday. They think most of those position unwinds are done, though they also see the potential for some continued risk from retail investors.

READ: JPMorgan Sees ‘Severe’ Unwind by Systematic Strategies Ending

There is one metric, at least, where the correlation to stocks has reverted to a more traditional arrangement: the Cboe Volatility Index. In January, the VIX was rallying along with the S&P 500 -- the correlation between the two rose to nearly -0.4 in the middle of that month -- which some saw as skepticism about the ability of equities to continue rising to records.

READ: A Hint of Angst May Be Emerging as S&P 500 Rallies With VIX

The VIX, which is generally seen as rising when stocks fall and vice versa, reverted further toward its old ways as the markets melted down. The correlation between the two gauges is now back to around -0.8.

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