The focus of most managed futures firms is always on the immediate price risk from daily trading. Does the market move against my position and how does that effect fund performance? Most will say if they control those daily risks everything else is secondary.
I was asked the question of what are my greatest concerns that are not directly related to price. I have come up with a set of risks that are not generally thought about during the daily activities of the portfolio manager but are relevant to the core business. This top ten list has no special order and I would be happy to hear from others on the non-price risks that we should be worried about.
1. Volatility (geopolitical/regulatory) event - The Greece and China crisis are two events which dominated the second quarter. Given the high degree of uncertainty, markets were choppy and did not follow any smooth patterns. The cause was the uncertainty concerning the actions of politician who can change the rules of the game. Game changing will have a significant impact on prices in ways that may not be mapped into the past events. These were "known unknowns." Many knew Greece would be a problem but few predicted the current outcome. The same applies to China. Most thought there was a bubble but few expected the policy applied by the government.
2. Margin increases - Increases in margin will have an impact on the cost of business as well as on the behavior of others who may be more capital sensitive. While volatility in many markets is down, there have been some exaggerated moves that create the potential for margin changes and feedback loops into prices.
3. Flash crashes - We have had equity flash crashes and we have had a bond flash crash. What is the probability that we will see another one in the next year? There is little that has changed structurally other than the fact that we now know that they can occur. If you have stops, this can be a major portfolio problem.
4, Market stoppages - It seems as though governments believe that markets are too important to be left to investors and traders. There is a stronger belief in the use of heavy-handed action to stop market declines. Just ask the Chinese government. Market stoppages are a real threat.
5. FCM risk - The FCM community is getting smaller, so futures risk is being more concentrated. The costs of trading will be going up and the choices available to traders has been falling. This is not good for those that need liquidity and are small.
6. Bank risk - There is more concentration of money in fewer banks who are dealing with higher capital requirements. They will not be market-making and their trading has been curtailed. The banks are not the same presence in futures markets as pre-2008. To some this may be a good thing, but there is high market risk on what will be the capital commitment to trading in a liquidity event.
7. Cash management - Yes, the Fed will be raising rates and there may actually be some interest acrrued in bank accounts, but the restrictions on money funds mean that your money may not be available to you in a crisis. The money funds also are required to have more liquidity through holding short-term liquid assets. This is will have a yield drag on funds.
8. Seg funds - With more FCM risk, low yields, and bank risk, there will be risks to margin money placed in set funds. New regulations limit what FCM's can do with cash provided, but if you ask most investors, there is not perfect clarity on what will happen in a crisis. Smart money minimizes the amount of funds held in seg funds.
9. Credit risk and CDX/swap risk - Credit risks are not traded in exchange traded futures but credit risk will spill-over into risk-on/risk-off trading. This is not usually monitored by managed futures managers. The swap risks which are now being exchange cleared are something that has not been tested through a crisis.
10. ETF flows - The ETF markets has grown substantially over the last few years and their trading has already impacted some commodity markets like oil. The trading in these products is mix between retail and institutional, but if liquidity is scarce, flows out of ETF's will spill-over to futures markets in ways that are not clear. Tracking flows has become an essential for measuring sentiment.
No comments:
Post a Comment