Risk on… Risk Off… Where’s Mr. Miyagi ?

On occasion, you may hear us refer to “risk on” or “risk off” market environments – which conjure up images of old Mr. Miyagi doing his ‘wax on/wax off’ training in the 80’s classic The Karate Kid.  But we’re not the only ones leaning on the jargon. These terms have become part of the lexicon since the 2008 highs and 2009 low. It seemed as though everything was sold off together, and everything bought back together, all at the same time, bringing the correlation across previously non-correlated markets perilously high.

What is “Risk on”/”Risk Off”?  Or the “Risk Trade” as it is also called at times. This all ties back to the financial crisis in 2008, when investors across the globe dumped everything which carried the risk of loss (meaning everything except US treasury bonds, priced in US Dollars – yes, even Gold) .  The term risk on came back when stock markets made a low in March of 2009 and nearly everything else started to go back up with it. Investors were back in the market willing to risk money (thus…risk on).  So, we have:

Risk On = Long: Stock Indices, commodity currencies (Aussie/Canadian/NewZealand), energy, grains, softs (cotton, cocoa, etc) and Short: US Dollar, Bonds, Yen, Swiss

Risk Off = Long: US treasuries, US Dollar, Jap Yen, Swiss Franc, Short: stocks, commodities, foreign currencies.

We typically here this ‘risk on’ or ‘risk off’ type of talk on days when there is green or red seemingly across the board (like this) following events like the Japan quake, another Greek bailout, and so on seemingly push everyone at the same time to go ‘risk on’ or ‘risk off’.

But what does it really mean? Is it real?  Or just financial reporters’ go-to phrase when they see green or red across the board?

Taking a look at the CRB Commodity index compared to the S&P 500 since June of 2008 and seeing how closely they have tracked , the risk on/risk off buzz seems to have merit.

For managed futures, it is a dangerous pattern and worth watching. Thing is, in a global risk on/risk off movement, the benefits of portfolio construction and portfolio diversification are largely thrown out the window… and managed futures returns will likely be more volatile than in past, with few buffers in the portfolio against trend reversals. If it’s all moving the same way at the same time, everything could go down (or up) at once, with no lifeboat in sight.

But when looking at the performance of various assets since June 2008 – there is more to the everyone down/everyone back up trade than meets the eye. Sure, they generally all went down, then back up, together – but there have been many zigs while others have zagged, with Crude down 20% since mid 08, and Wheat up 40% over the same time. So while the general trend seems to be an overall risk on/risk off environment where markets can all move in tandem on a big up or down day – don’t forget about all of the other days in between.

Those days when markets are mixed are where managed futures are likely to make hay in our opinion, benefitting from portfolio diversification and those different zigs and zags.

2 comments

  1. […] sentiment changes have dominated global market dynamics for several years (see this write-up from Attain Capital for an […]

  2. […] the past decade average (pairwise) correlation among “risk assets” has been on the rise (Chart below). What is a risk asset you might wonder? Well it simply put […]

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.