Central Banks as Market Influence

Terry Flanagan

The U.S. Federal Reserve and other central banks around the world have expanded their influence to the point that it has changed the character of financial markets.

That’s the view of Robert Doherty, chief executive of Doherty Advisors, a $322 million hedge fund specializing in volatility arbitrage. “It really has become more of a behavioral market rather than what people would perceive as a quantitative market,” Doherty told Markets Media.

Doherty, who is scheduled to speak on a panel at Markets Media’s Summer Trading Network in New York on July 10, cited monetary policy as the biggest macro factor in current markets. “The overall driving force is the Federal Reserve and other global central banks,” he said. “The next two to three years will be quite interesting to see how the Fed tries to engineer the withdrawal of some liquidity.”

A smooth unwind “is going to be very difficult,” he added.

New York-based Doherty Advisors, which was founded in 2003, does best when markets fluctuate. “In general we run counter to the rest of the world in that we like to see downward markets, because it raises implied volatility,” Doherty said. “As implied volatility elevates, spreads widen and there are more (investment opportunities) to take advantage of.”

“Over the past three years, the Fed and other central banks have tried to engineer and take some volatility out of the market, which has not been the best environment for us — specifically this year, when the market basically did a slow ratchet to the upside,” he continued. “I think that’s about to change as we get into a more ‘normalized’ type of environment. The second half of this year is going to be quite a bit more interesting than the first half.”

In terms of asset classes, Doherty said equities are hot, especially U.S. equities which remain “the asset of choice.”

“What’s not is a whole laundry list, including metals and other commodity markets, which then translate into the Brazils and the Chinas of the world,” Doherty said. Such emerging economies are “more commodity and real-demand driven.”

Doherty Advisors is 100% options based, trading contracts on S&P 500 index futures and 10-year U.S. Treasury futures. “We have a very defined focus on the two main benchmarks,” Doherty said.

“Our strategy is totally market-direction agnostic and implied-volatility agnostic,” Doherty added. “We take whatever implied volatility that currently exists, and simply try to extract out as much mathematical relative value as possible.”

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