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Fasanara Capital
Fasanara Capital



Please find the link to the article at The Financial Times, where Fasanara Capital is mentioned: link .
Please also find a transcript of the article below - without pictures.

 25th Febraury 2019
Investors’ herd behaviour makes markets more fragileut

Equity markets have enjoyed a stonking start to 2019. The S&P 500 has powered ahead about 11 per cent since the turn of the year and the FTSE is 7 per cent higher, as recession fears have subsided and central banks have made dovish noises. For most investors, the fourth quarter sell-off is a distant memory. Life is good once again.

Nevertheless, there are some signs that market conditions may have subtly changed. 

The fourth quarter’s 20 per cent drop in the S&P was of a different magnitude to previous selloffsover the past five years, which have been shallower. Volatility, too, has normally settled down more quickly, such as in autumn 2014 or early 2016, while each time the market has gone on to quickly hit new highs. Even in the downturn between mid-2015 and mid-2016, the market came very close to touching its previous highs on several occasions, before finally breaking through in summer 2016.

In February 2018’s sell-off, in contrast, the market laboured for the first half of the year and only finally approached previous highs by the summer. Even after this year’s big rally, the market is still 5 per cent off its highs.

If the behaviour of the market has indeed somehow changed, the answer may be linked to the ending of quantitative easing. This, alongside uncertainty over issues such as trade and political instability, seemed “to be driving more acute market reactions to moderating real economic data”, according to analysts at Citigroup.

Some go further. Francesco Filia, founder of Mayfair hedge fund Fasanara Capital, pointed to what he termed a “fragility” in the market that had been more apparent in recent years.

The theory goes like this: trillions of dollars of QE has lifted stock markets but had the side effect of pushing investors into worryingly similar trades. Stockpicking and short selling have not been worth the effort. Hundreds of billions of dollars have flowed into risk-parity funds, which follow strategies that bet on low volatility, and passive funds that track indices.

During a market fall, it is likely that risk-parity funds will sell equities to cut risk, while volatilityselling strategies do likewise to hedge their positions. Outflows from exchange traded funds are also likely. All of these can amplify market downturns.

At the same time, the more QE is used — and it has now been used a lot — the less its marginal effectiveness, argues Mr Filia. Eventually, markets come to depend on the promise of more QE, as may be happening now. Central banks felt the need to hint at further QE or looser policy last
month, giving a boost to markets.

The net effect is to make markets more susceptible to bigger sell-offs, which can be triggered bysmaller events. Mr Filia referred to an “unstable equilibrium”, or “a state in which a small disturbance produces a large change”.

Markets may feel good now, in short, but they may be more fragile than we think.



More readings:

10th Jan 2018 - "Edge of Chaos"
20th Nov 2017 - "Positive Feedback Loops"
11th Oct 2017 - "Market Fragility"
25th July 2017 - "Twin Bubbles"
3rd May 2017 - "Fake Markets"
11th Oct 2017 - "Changing Market Structure"
26th Nov 2017 - "Fake Market Narratives"