Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

Fund managers are taking a record level of risk

Jason Goepfert
2021-01-20
A monthly survey of fund managers from Bank of America shows a consensus forming around long emerging markets and bitcoin. More troubling, there is a record number of managers currently taking a higher than normal amount of risk.

Each month, Bank of America posts a survey to its clients, covering around $560 billion under management.

We've looked at the survey many times in the past, with the conclusion that it tends to have a slight, and inconsistent, contrary bias. This may be very smartest of money, but extremes in group-think among any population can be an issue.

Through the month ended January 14, managers were the most overweight emerging markets in at least 13 years. At the same time, they dropped their overweight allocation to the U.S., so the spread between them is unusually wide.

Below, we can see the spread in the percentage of managers who are overweight the two markets, along with the ratio of the MSCI Emerging Markets Index to the S&P 500. The red dots highlight those months when the spread was 50% or more like now.

There hasn't been much of a consistent pattern, other than managers tended to increase their overweight toward emerging markets when they had better relative success against the S&P. That's to be expected. The only thing we really care about is whether these extremes led to any consistent pattern going forward, which they didn't. Sometimes emerging markets continued to be a better relative performer, and a few times it preceded a peak in the ratio. Doesn't tell us much, except maybe it's not a good reason to sell emerging markets.

Another notable takeaway from the survey was another jump in risk appetite. About 20% of respondents said they were taking a higher than normal risk, a 20-year high.

We've superimposed that measure against a chart of the S&P 500. It's not perfect but is enough to give us a sense of whether we should be concerned about this level of confidence.

From the chart, the conclusion seems to be, "kind of." Many of the forays into higher-than-normal risk preceded times when the S&P was near a peak or at least a multi-month plateau. It was a complete fail in 2013 as stocks entered a creeper uptrend, but other than that was a pretty effective warning sign.

Another one of their popular visuals is which market these managers feel is the most crowded trade. This month, it was being long bitcoin.

That market was chosen as the most crowded twice before, in September and December 2017.  NOTE: This was edited after initial publication to add the September 2017 date.

In September, we looked at how effective it would have been to take the opposite side of the most crowded trade every month, going back about 8 years. The conclusion was "not very," as there was a modest tendency for the most crowded trade to get even more crowded in the months ahead. That previous pick of bitcoin stands out as the all-time best fade among all the picks, but overall it has not been profitable to fade a market just because these managers thought it was the most one-sided market.

Overall, the survey is a minor cause for worry. The confidence expressed by how many managers are taking higher than normal risk is the biggest culprit, as it has a decent track record of being a contrary indicator. There was also another drop in cash levels to a historically low level, so there isn't much of a cushion if things turn south. If losses mount and clients start to redeem, then without much cash as a buffer, ostensibly the managers would have to sell existing positions, potentially triggering a cascade of selling pressure.

There are plentiful signs of speculation in stocks right now, the setup for a coming fall. We're just not yet seeing the kinds of internal deterioration within indexes or high-yield bonds, or a turn in risk appetite, that typically act as imminent warning signs.

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.