If you had a p&l 2008-10 you remember how fiercely disbelieved the second-derivative rally of Obama’s “profit-and-earnings ratios” + Bernanke’s ”greenshoots” were. If it was your first crash, you probably have a painful memory of going to cash, “hedging”, shorting, or buying PUTs

It seemed insane if you lacked experience. How could the market go up just because things were getting worse at a slightly lower pace than last month? Market participants screamed “too far, too fast” in rage, but most of them actually wanted to be buyers if the market went lower

The subtle but important distinction to be made is “allowing for the outcome distribution to include a larger drawdown because the conditions warrant it” and rooting for the price to go lower so you can buy it. The price can’t go down unless there’s nobody willing to buy lower

This is why market structure, plumbing, and analysis of systematics works and fuzzy “psychology” / “sentiment” measures don’t. Any phase described by a collective emotion is a fantasy in today’s market. to quote my fav trader (I heard he was awesome): IT’S ALL ABOUT THE POSITIONS

Why do markets go lower bc they went lower?
-activities sensitive to volatility:
— imbalances in gamma positions between delta-hedgers & non
— risk-based margining
— VaR-limited dealer inventories
— explicit knock-ins
— — exotic options
— — option-like instruments (levered ETFs)

— implicit knock-ins
— — hard drawdown or risk-limits at prop trading firms, hedge funds, dealers
— — stop losses
— — systematic risk control at the asset class level
— — margin calls (non-renewal) & maintenance margins violations (seizing & liquidation of hypothecated positions)

Likewise sometimes an asset goes down simply because a different asset went down. These can be caused and aggravated by activities sensitive to changes in covariance like:
- deliberate cross-over actors
— real money: banks, mutual funds
— levered money: cross-asset “arbitrage”

- non-deliberate dominant deltas
— exotic options (knock-in worst-of rainbows, principal-protected products)
— taking possession of collateral due to default by counterparty
- covariance sensitivity
— systematic investor risk-control (eg risk parity)
— multi-strategy risk-control

The common thing about these is that they keep spreads tight, trends stable, and volatility muted most of the time but after a certain trigger is breached, they aggravate the move by (partially) unwinding. But that also means they eventually exhaust (blow-off tops, crashes down)

anyways the point is: Cash, PUTs, and shorts are only hedges when you have some sort of portfolio constraint (like leverage or soft or hard RV or drawdown cap) that necessitates you limiting the distribution of outcomes to remain a going concern that can experience recovery.

The things that happened already happened. (Tautology can be useful). There’s no repeat of risk-control or portfolio deleveraging or exotics triggering or stops triggered. The (largely) real-money that provided liquidity & took risk has much higher IRR hurdles and risk-tolerance.

And in the case of the Fed LSAPs all that p&l product disappeared from the market and was replaced by par product (reserves). Even a lower level of risk appetite necessitates higher prices just due to the quantity of p&l product that permanently disappeared

There’s nothing to be gained by looking at last week’s prices. Every day is a blank slate, how far the levels of last week are is irrelevant. focus on the positions. ITS ALL ABOUT THE POSITIONS. and remember: if you *want* the position to pay-off, then it isn’t actually a hedge

If you are rational, you never ever ever ever bet on tail scenarios (left or right) you simply take the positions that ensure that if a tail scenario materializes, you survive and are able to be there for the recovery. If you stand to come out net-net a huge winner, it’s gambling