May 6th “Flash Crash” a Systemic Event?
Following our previous analysis of the Waddell & Reed fund we performed a similar analysis of a group of the largest equity funds with combined AUM over $500B. Average fund exposures are shown in chart below (bottom part) and contrasted with the Ivy Asset Strategy fund (top). The Ivy fund is not included in this […]
Following our previous analysis of the Waddell & Reed fund we performed a similar analysis of a group of the largest equity funds with combined AUM over $500B. Average fund exposures are shown in chart below (bottom part) and contrasted with the Ivy Asset Strategy fund (top). The Ivy fund is not included in this group of funds.
Note an unusual sharp pattern of building up cash (or hedge) for both the group and the Ivy, from a weighting at or near zero, in early May demonstrating a very different pattern from other accumulation patterns YTD.
For convenience, we presented another chart that shows only exposures to cash or, potentially, hedged portion of the portfolio. It indicates that more significant amount of stocks was sold over very short period of time 1-2 days than $4.1B in futures reportedly sold by W&R. What we are seeing here is that a large number of funds were engaged in similar trades before and during the time the W&R trade took place. Therefore, it’s hard to say what triggered the “crash”–a single $4B trade or dozens of smaller ones.
Viewing W&R’s behavior against the larger investment universe is helpful in seeing that there was a trend amongst managers in reducing exposure to the market leading up to May 6th. As evinced by W&R through the period in this analysis, a large trade/hedge in an environment of illiquidity can have impacts different than such a trade in different market conditions. Such regular surveillance on a systemic, non-intrusive level can benefit a range of market participants and overseers (including regulators, fund managers, risk managers, investors, exchange operators and others) in identifying trends and spotting potential red flags. Such analysis could inform manager activity, intervention policy, etc.