- The Dow plummeted 1,000 points for the second time in a week on Thursday.
- While some said the selloff on Thursday felt more human, there are those who see the influence of machine-based traders once again.
- "The slower moving strategies such as risk parity and vol target funds tend to move over a week or so later, thus leading to the second wave of selloff," one hedge fund manager told Business Insider.
The Dow plummeted 1,000 points for the second time in a week on Thursday. Perhaps we shouldn't be surprised.
The sharp fall on Monday was widely blamed on machine-based traders, with the blow-up of two exchange-traded products exacerbating affairs. And while some said the selloff on Thursday felt more human, there are those who spy the influence of machine-based traders once again.
On Monday, a spike in volatility led to a forced selloff in stocks by short-volatility funds that had to cover their positions. It was a different group of investors that led the activity on Thursday, Katina Stefanova, CEO of $200 million hedge fund Marto Capital, told Business Insider.
"The second sell-off in markets today is within expectations given the spike in volatility that happened earlier in the week," she said. "The slower moving strategies such as risk parity and vol target funds tend to move over a week or so later, thus leading to the second wave of the selloff."
"We saw markets play out similarly in 2011 and 2015 where the first correction was followed by stabilization and then another selloff."
This view was echoed by another hedge-fund manager, who said he thought much of the selling on Thursday came from risk control indices, which he described as popular investments that invest in equities that offer leverage that's targeted to recent realized volatility.
"They only adjust their leverage with a 2-3 day lag in order to avoid creating intra-daily vicious circles," the manager, who couldn't be named, told Business Insider. "So when we had that big crash on Monday, it moved 2-month realized volatility up from around 10% to closer to 13%, which would imply a 30% deleveraging coming yesterday and today. There are hundreds of billions of assets in products like this."
And Timothy Ng, chief investment officer at Clearbrook Global Advisors, a consultancy, also saw machine-based traders at play in Thursday's selloff.
"The market decline we believe is an unwinding of leveraged positions, short volatility positions, the selling/re-positioning by risk parity and perhaps even some retail selling as a good amount of individual investors starting re-entering the market late last year after a sizable run-up in the equity markets," he said. "Selling pressure is also coming from the algo and technical traders as the markets in this downturn are breaching several price support levels."
Ng added that "market technicals are very negative," saying the selling could go on for another week. That could then present an opportunity for investors, he said.
"Once the market stabilize investors need to go back to fundamentals as equities have become much cheaper and can provide opportunities to pick up solid companies at attractive valuations. This was hard to find just over a week plus ago."
