Did Computers Crash the Stock Market?
2020 has definitely been a hard time for everyone, especially many investors.
The Dow Jones had a peak to trough drawdown of over 35%.
A sharp decline in gamma and net long positions in S&P 500 futures tell that CTAs must have deleveraged, selling a large number of positions through their quantitative systems, which triggered the stock market crash.
Laying out the various classes of investors, Kolanovic identifies:
Option hedging ~$40-50Bn of outflows,
CTAs ~$40-60Bn of outflows,
volatility targeting strategies ~$40-60Bn of outflows.
One the other hand, in a note from Nomura's, Masanari Takada, the Japanese quant reaches the opposite conclusion, writing that "equity long/short funds and global macro hedge funds unloading long equity positions, CTAs may have been late to move for the exit."
Takada points out that hedge funds pay more attention to fundamental aspects affected by COVID-19 than those CTA algo traders and they are more likely to take early actions.
In fact, this is not the first time that macro hedge funds and CTAs have suffered such skepticism. As far as this stock market crash is concerned, it is difficult to verify who has the greater responsibility.
But it is certain that both the CTA and traditional macro hedge funds are a double-edged sword for the market. The fights between these two will aggravate market volatility to a certain extent, which is very bad for investors.
Written by Harrison Pan
Edited by Alexander Fleiss, Jack Argiro, Gihyen Eom & Calvin Ma