It’s below the surface, where collections of look-alike stocks groupedcording to investment traits like cheapness or profitability have fallen ac into even deeper slumber than the market as a whole. Average daily price swings in market-neutral momentum and volatility are the smallest in four years, data compiled by Bloomberg show.
So puny are the payouts that concern is building among analysts that quantitative managers will react by taking ill-advised risks. Rarely ones to wait, traders in this mathematical soup sometimes look to juice up returns.
“If you’re in a long-in-the-tooth factor that everyone is involved in, that’s going down in volatility, one way to offset the reduced returns is with leverage,” said Mark Connors, the global head of risk advisory at Credit Suisse Group AG. “For any event, whether it’s a blip or a big macro event, there’s then a greater chance of sharp deleveraging.”
Connors says clients have been calling his desk to report signs of rising leverage in markets. They also want to know if this could lead to forced selling among quant funds that control as much as $500billion.