MarketsMuse editor note: below insight courtesy of Rareview Macro LLC’s global macro strategy newsletter “Sight Beyond Sight” is a great read for investment professionals who want to start off 2015 on the right leg.
Wrong Way First (“WWF”) Trading
An astute market practitioner that we are fond of once coined the trading phrase “Wrong Way First” (“WWF”). WWF refers to the risk the professional investment community is exposed to at the beginning of every New Year – that is, the first trade will be a reversal in the consensus positioning and inflict severe PnL duress.
While it is true that substantial wealth is only really created over time (i.e. by investing), the money management business is beholden to the Gregorian calendar and that means performance resets at the close of business on December 31st. Put another way, if you manage money for a living you’re only as good as your last best trade.
Therefore it should be of little surprise that professionals begin each January more focused on not getting caught up in a New Year’s malaise rather than trying to take advantage of opportunities by adding new risk or pressing 2014 positions. The memory of last January, a month which included the unwind of the long Japanese Nikkei and Chinese Yuan carry trade strategies and inflicted severe PnL duress, is still too fresh to forget. This is especially true considering it took the macro strategy six months to climb out of its negative PnL hole and it was only saved when the US Dollar theme sent down a ladder to climb up.
While there are many key discussions underway to start 2015 it is important to highlight that the dominant theme emerging from our discussions with any risk takers is concern over a WWF trading theme materializing. Such is the nature of this business, especially for absolute return strategies.
Our interpretation of these conversations is that the tolerance level to withstand PnL duress around any theme that is currently at a momentum and sentiment extreme – such as long Equities, fixed income duration, and the US Dollar, short Crude Oil, and underweight Emerging Markets – is very low.
As way of background if you apply this theme to actual positioning it reveals that the top WWF candidates across the major asset classes are: Continue reading