Return Dispersion: The 2025 Story | Systematic Investor | Ep.380

Episode Overview

• A deep dive into the market turmoil of March, focusing on the banking crisis (SVB, Credit Suisse) and its impact on systematic strategies.
• Analysis of the performance of trend following strategies, which faced significant challenges due to sharp reversals in bond and equity markets.
• Discussion on the changing market regime, including the persistence of inflation and the breakdown of the traditional stock-bond correlation.
• A forward-looking perspective on asset allocation, exploring the future of the 60/40 portfolio and the role of alternative risk premia.

Key Concepts

• March Market Turmoil: The panel dissects the sudden banking crisis, the VIX spike, and the aggressive central bank response, which led to a rapid reversal in market trends.
• Trend Following Performance: An examination of why trend following strategies, particularly those with longer lookback periods, struggled during March's sharp V-shaped recovery in bonds and equities after an initial sell-off.
• Volatility Dynamics: Discussion on the nature of the volatility spike, how it was concentrated in specific sectors (like bonds and financials), and the implications for volatility-selling and buying strategies.
• Inflation and Central Bank Policy: The group debates whether recent events will lead to a pivot from the Federal Reserve and discusses the potential for inflation to remain structurally higher for longer.
• The 60/40 Portfolio: The panelists question the viability of the traditional 60/40 portfolio in a new market regime where the negative correlation between stocks and bonds is no longer guaranteed.
• Asset Allocation in the New Regime: The conversation explores how investors should adapt their portfolios, emphasizing the need for true diversifiers like managed futures and other alternative strategies.

Quotes

• At 03:03 - "You had this huge structural short gamma position in the banking sector... that obviously unwound in a very aggressive way. That drove a lot of the chaos." - Cem Karsan explaining the underlying driver of the banking crisis and market volatility in March.
• At 25:31 - "Trend following works best when you get these slow, grinding trends. It really doesn't work very well when you get these sort of V-shaped, very fast reversals... and that's exactly what we had in March." - Rob Carver providing a clear explanation for why trend following strategies underperformed during the month.
• At 47:33 - "The simple idea that bonds will save you when equities go down, I think that's broken. That world is gone." - Mark Rzepczynski commenting on the breakdown of the traditional 60/40 portfolio's core diversification principle.

Takeaways

• Be prepared for sharp market reversals that can challenge systematic trend strategies; what seems like a new trend may reverse violently on central bank action.
• Re-evaluate the role of bonds as a diversifier in your portfolio, as the era of reliable negative stock-bond correlation appears to be over.
• Consider allocating to strategies that can profit from market dislocations and changing correlations, such as managed futures and volatility arbitrage, to build a more resilient portfolio.