It’s not the plane, it’s the pilot

It’s not the plane, it’s the pilot

The sequel to “Top Gun” is not “Top Gun 2,” but “Mamerrick.” The U.S. Navy has been reborn as a focus of high-tech science, such as fifth-generation fighter jets and attack drones, for more than 30 years since its premiere. The top gun, which is the cradle of the production of capable fighter pilots, seems a lot old in light of the present era. Nevertheless, Maverick’s performance gives viewers a thrilling feeling when he gets an upper hand in various air battles with cutting-edge fighters, in addition to his affection for the actor who is growing old together. As seen in the Go match between Lee Se-dol and AlphaGo years ago, the machine-to-human match comes to viewers as a proxy war, but the human’s inner fear and the expression of inferiority must be emotions.

The recent sharp decline in major stock markets and a subsequent rapid V-shaped rebound make us realize the rapidly changing structural changes in the financial market. The media cites the U.S. economic recession concerns and the clearing of the yen-carry trade as the main reasons for the decline. It may have been an excuse, but the nature of this radical price adjustment seems to be related to the expansion of the algorithmic strategy and the derivative-linked ETF market.

Unlike in the past, the changes in the market environment caused by these strategies are summarized as follows.

1. low mobility
   ● Vol control funds, target risk funds, and covered call ETFs are commonly referred to as uncorrelated and low beta strategies, but they are the same in that they are short vol players. Unlike in the past, the low mobility environment is fixed as the market share of the Algorithm rule-based strategy based on complex mathematical models and sophisticated programs increases as the demand for portfolios that are separated from traditional assets increases. The part where the VIX temporarily exceeded 60 and returned to its historical low level shows the market dominance of these strategies as it is. Discretionary managers are not allowed to make such trades.
2. synchronization
   ● The expansion of the Alternative Risk Primia strategy increases the synchronization between assets. In the past, bonds and stocks had a large benefit in diversifying their portfolios in the traditional financial theory, but as the demand for these strategies grows, basket trading by style and factor such as Momentum, Value, Carry, Hedge, and Tail risk becomes common. This weakens the traditional pricing logic between assets and strengthens the Herding effect. Recently, stocks and bonds have returned to negative correlation after a long period of synchronization, but there is a high possibility that they will end up being short lived.
3. Tilting phenomenon
   ● Trend follow-up trading such as CTAs and HFT strategies is becoming more common. Recently, the active fund market has contracted rapidly, while the fund market based on advanced computer programs of quant managers is expanding. Most of them are not futurists. Most of them play based on momentum strategies using vast DBs such as past economic indicators and asset prices. There is no choice but to strengthen the bandwagon effect of the market. Conversely, traditional PMs are often Contrarian investors. It is difficult to keep up with soaring prices, but this is why it is not easy to sell stocks that are falling sharply. If trend follow-up changes to the big axis of the times, the shift inevitably causes a price surge and the importance of volatility management becomes greater.

Many strategists still predict a recession due to the reversal and normalization of U.S. short- and long-term government bonds and make conservative market forecasts. However, the proportion of large U.S. tech is absolute in the industry and index now, which significantly lowers the explanatory power of the traditional inventory cycle and leads to a reduction in economic sensitivity. In conclusion, responses and strategies based on changes in the nature of the stock market themselves are more important than the real benefits of the recession outlook.

Over the past week, fund managers at large management companies with superior systems and organizational power have been unable to actively respond to the market, citing unexpectedly risks and economic insolvency. It is difficult to see professional management personnel who combine with the wildness of investors as much as before. It is the result of not having any concerns about the market or being soaked in the comfort of the system.

If you understand the current market and its essence accurately, I think your wild temperament, which catches even falling blades, has seen more light than ever.

The color and shape of the market are changing structurally, but the nature of investment remains the same.

Pursuing profits through accurate judgment and decision-making

This is a fatal limitation of a trailing AI model that only looks at the past and present. On the other hand, human’s unique intellectual ability to look to the future through the past and present must be preserved as the only advantage when it comes to investment.

Today, someone sincerely wishes to be Maverick in the financial market.