The ATM Syndrome

Discussion in 'Professional Trading' started by ASusilovic, Mar 24, 2009.

  1. The ATM Syndrome

    There were more than 1.5 million Automated Teller Machines worldwide
    as of 2006, according to Wikipedia. Commodity trading advisors could
    be added to that number. As highly liquid money managers, they’ve
    been meeting investors’ need for cash amid the credit contraction.

    People are getting cash where they can while waiting for the hedge
    funds that froze withdrawals to reopen the gates. As a result, certain
    managed futures funds with extremely strong performance had big
    redemptions that dwarfed capital inflows.

    What’s going on with investors? I asked our editorial advisor Tim
    Merryman, who not only talks with people in the know but looks at a lot
    of data and is a CTA himself. Tim has a hypothesis.

    In recent years pensions and other investors tried to diversify their
    portfolios with long-only commodity allocations. But in the fourth
    quarter of 2008, commodities went down together with other markets.

    It happened in a few months, too fast for institutions to rethink the
    concept of long-only commodities as a hedge, consider long/short
    futures managers as an obvious alternative and change their allocations.

    In the extreme turmoil, investors no longer looked for a hedge, just for
    cash. Hence the ATM syndrome.
    “Markets went to hell in a hand basket so quickly that people did not
    get around to hedging,” Tim says.

    “Allocators don’t like the idea of
    catching a falling knife. Why hedge a position when you think it’s going
    down further? People prefer to go to cash and wait it out.”

    A rally in stocks could ease the strain on portfolios and change
    investors’ calculus. “Some allocators may feel slightly more comfortable
    hedging with managed futures at this point,” says Tim.

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