‘Risk On, Risk Off’ Regime May Be Here To Stay

Terry Flanagan

Despite a rip-roaring start to 2013 for equities, the ‘risk on, risk off’ mentality that has characterized many trading strategies following the fallout from the financial crisis may be here for some time to come yet.

Switching between high risk and low risk investments has happened with more frequency and in greater volumes in the past five or so years, with investors more likely to have behaved in a herd-like manner during these times of economic uncertainty.

This year, though, began with a bang with volumes returning to equity markets—albeit from a low base—as a third round of quantitative easing measures across the globe have forced investors out of safe haven bonds and into riskier investments such as equities with some buy-side traders becoming cautiously optimistic that 2013 could be the year of a return to trading on fundamentals.

Although following an inconclusive end to the Italian general election last month, which brought eurozone debt fears back on to the table, slowing growth in China and the recent failure to reach a deal in the U.S. over budget sequestration, and fears over ‘black swan’ events have begun to resurface in the minds of investors.

“We think that talk of the great rotation at this stage is premature given the potential for many road bumps ahead, not least a resurgence of eurozone stress, fears of a credit related bust in China and the inability of politicians on both sides of the Atlantic to set in motion a credible solution to dealing with the significant debt burden,” said Najy Nasser, chief investment officer of Headstart Advisers, a London-based hedge fund.

Anthony Lawler, a portfolio manager at hedge fund manager GAM, concurred: “The choppiness in markets in February is not yet being taken as a sign to take risk off.”

Although Lawler was slightly more optimistic in his outlook going forward.

“While the underlying tone to positioning is still bullish, some overstretched areas of the market underwent a natural pull-back,” he said. “Hedge fund managers are certainly cognizant of the risks of slowing growth in China, the unresolved issues in Europe and further fiscal retrenchment in the U.S. from sequestration.

“But despite these risks, managers in general continue to hold positioning that implies their belief that risk markets will trade on fundamentals this year. This means that managers are seeing opportunities in areas such as currencies, commodities and equity markets.”

A recent survey of fund managers by Aviva Investors, an asset management firm, that was conducted in early February has also revealed that equity investors are far more confident about their markets than their fixed income counterparts.

The survey, which asked respondents based in the U.S. and Europe, found that the majority of equity managers (69%) were more confident about markets than they were this time last year, with only a minority of fixed income managers sharing the enthusiasm of their equity peers (26%).

“It is interesting to note the important role that confidence plays even to professional investors,” said Peter Fitzgerald, co-head of multi-manager at Aviva Investors. “While equity investors are often those with a more optimistic view, the year on year change and divergence in sentiment is dramatic.

“On the back of a year of strong returns, equity managers have become more bullish and far more confident than their fixed income peers. Whilst risks have by no means dissipated entirely, as exemplified by the recent Italian election results, it does appear as though the investment professionals are expecting a rotation from bonds to equities.”

Related articles

  1. $63.8bn of shares were executed in the Closing Cross in 2.04 seconds in Russell's annual reconstitution.

  2. Auerbach Grayson Launches U.S. Equities Trading Business
    Daily Email Feature

    FTX US Boosts Equities Business

    The US regulated cryptocurrency exchange has acquired Embed Clearing.

  3. Bats IPO Boosts Exchange Competition

    FESE members have been developing and publishing their playbooks on outage protocols.

  4. Equity, Fixed Income ETFs See Inflows

    EFAMA said concerns about rising inflation and monetary policy hit bond funds in the first quarter.

  5. MFA analysis shows that shorting carbon-heavy stocks is an effective mechanism to hedge climate risk.