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As we brace for FOMC today, it is worth conducting a spot check on systematic equity positioning.
CTAs are long stocks, with most strategies nearly ‘fully allocated’. Some of the more tactical leaning strategies are less extreme, but the broad picture is bullish.
Similarly, the vol controlled funds, i.e., strategies seeking to target a certain vol level by amending their allocation to equity (based on the level of realised, not implied vol), are also near max allocations. This cohort is a c. $3-400bn strategy mix that have slowly and durably added to equities all the way up.
The takeaway is that given current allocations, small changes in market perception or realised behaviour (regarding vol), can cause these strategies to sell equities in the weeks ahead. This may exacerbate movements on the way down and provide a false signal to investors.
Regarding CTA positions, we find the levels to watch are 6,536 for shorter term signals, while the medium-term signal is nearer 6,400.
Vol managed funds are easier to model, as the interaction between one- and three-month realised vol is a key input in shifting equity positions. For now, this metric is not close to providing a sell signal.
