How ‘re-correlation’ risk could cause a pod-shop unwind

With a substantial rise in pod shop assets (funds which trade multiple strategies and are typically composed as a collection of autonomous trading teams), how significant is the risk of an unwind spreading across the multi-strat peer group and the markets at large?Proud to share some data and perspective with Rob Mannix for a recent article in Risk.net. Our data shows for example that assets managed by these firms have more than doubled since the start of 2019 to $342 billion.

Given this magnitude of attention, the risk lies in correlation. For example, a “sudden spike in correlations could cause a multi-strat firm’s volatility to increase sharply and trigger margin calls that would force funds to sell assets into falling markets.”

However, Jon Caplis notes “if anything, diversification within multi-strats has actually increased recently, at least generally. The risk of crowding may be lower today than in the past.” Figures from PivotalPath show the correlation of individual pod shops to [it’s Multi-Strategy] Index, to be in the lowest quartile in their history.

This is likely due to the fact that many firms have made changes to their setup, at least in part to limit the chances of re-correlation occurring. In the past many were focused heavily or exclusively on US equity markets. More recently, funds have started to branch out into different asset classes and geographies in addition to increasing their focus on correlation risk.

It’s an important trend to watch! More details in the link below (subscription may be required).