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Aug. 26, 2019, 11:37 a.m. EDT

Investors face a crisis 10 times worse than the ‘Quant Quake,’ hedge fund warns

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By Shawn Langlois, MarketWatch


Walt Disney/Everett
Don't bite it... DON'T!

A year ago, Francesco Filia of Fasanara Capital told The Wall Street Journal that, “If my analysis is right, we’re past the point of no return,” and that “nothing else will do than having cash or shorts.”

It was a big “if,” of course.

Turns out that was just one of many doom-and-gloom misfires that have been popping up across financial media during this long bull run. But recent pullbacks, including Friday’s nasty plunge on the Dow /zigman2/quotes/210598065/realtime DJIA -0.95% , have given weary bears a reasons to crow, and, yes they’re, crowing.

In its most recent report, Fasanara likened negative rates to “the magic and poisonous blood-red wishing apple, sending Snow White into deep sleep.”

The hedge fund borrowed a favorite adjective from the president, saying these are “fake” markets, “where valuations are nobody’s problem, and the structure of the market itself morphs in response, to become undiversified, passive, price- and risk-insensitive, abnormally sluggish, half asleep. In induced lethargy.”

Fasanara explained in the call of the day that the lack of liquidity could lead to an explosive move once the unwind inevitably begins.

“Unlocked hot money, retail driven, passively managed: the daily liquidity risk is highly underestimated today,” the hedge fund wrote. “With it, the so-called ‘gap risk’, especially overnight gap risk. Which bring us to the real danger in markets these days being the market itself.”

He said, at any moment, stocks could implode under their own weight.

“If a large-enough shock event takes place,” he explained in his latest outlook , “the market system may find it hard to absorb selling flows, therefore leading to a snowball effect of more selling flows and large downside gap risks.”

Fasanara said the blueprint for the next crisis isn’t 1987, 2000 or 2008. It’s the “Quant Quake” of August 2007. That’s when, leading up to the financial crisis, quant funds, including the Goldman Sachs /zigman2/quotes/209237603/composite GS +0.03% QIS fund, lost billions of dollars as highly-correlated trading algorithms inexplicably dumped stocks.

“This time around it may be 10-fold worse, insofar as it would not be isolated to quant funds but rather sprawling across fast through the undiversified passive expensive financial network,” Fasanara warned.

The market

The Dow /zigman2/quotes/210598065/realtime DJIA -0.95%  , Nasdaq /zigman2/quotes/210598365/realtime COMP -0.83% and S&P /zigman2/quotes/210599714/realtime SPX -0.39% were all bouncing back from Friday’s trade-induced selloff, after Trump said China wants to get back to the negotiating table. Gains were tempered, however, after closely followed Global Times editor Hu Xijin said calls between U.S. and Chinese officials were merely at a “technical” level.

At last check, gold /zigman2/quotes/211755585/delayed GC.1 -0.07% was getting a risk-off lift and silver /zigman2/quotes/210315219/delayed SI00 -0.05% was also higher. Oil /zigman2/quotes/211629951/delayed CL.1 -0.15% was up almost 1% and the dollar /zigman2/quotes/210598269/delayed DXY -0.48% was in the green, as well.

Europe stocks /zigman2/quotes/210599654/delayed XX:SXXP -0.32% turned higher midway through their session, while Asia markets /zigman2/quotes/211618636/realtime XX:ADOW -0.11% ended in the red.

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
26,770.20
-255.68 -0.95%
Volume: 293.61M
Oct. 18, 2019 5:08p
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/zigman2/quotes/209237603/composite
US : U.S.: NYSE
$ 206.52
+0.06 +0.03%
Volume: 2.21M
Oct. 18, 2019 6:30p
P/E Ratio
9.24
Dividend Yield
2.42%
Market Cap
$74.26 billion
Rev. per Employee
$1.34M
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
26,770.20
-255.68 -0.95%
Volume: 293.61M
Oct. 18, 2019 5:08p
loading...
/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,089.54
-67.31 -0.83%
Volume: 1.82M
Oct. 18, 2019 5:16p
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/zigman2/quotes/210599714/realtime
US : S&P US
2,986.20
-11.75 -0.39%
Volume: 1.99B
Oct. 18, 2019 5:08p
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/zigman2/quotes/211755585/delayed
US : U.S.: Nymex
$ 1,487.20
-1.00 -0.07%
Volume: 82.00
Oct. 18, 2019 11:14a
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/zigman2/quotes/210315219/delayed
US : U.S.: Nymex
$ 17.57
-0.0080 -0.05%
Volume: 47,215
Oct. 18, 2019 4:59p
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/zigman2/quotes/211629951/delayed
US : U.S.: Nymex
$ 53.70
-0.08 -0.15%
Volume: 156,871
Oct. 18, 2019 4:59p
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/zigman2/quotes/210598269/delayed
US : U.S.: ICE Futures U.S.
97.14
-0.47 -0.48%
Volume: 0.00
Oct. 18, 2019 5:30p
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/zigman2/quotes/210599654/delayed
XX : STOXX
391.84
-1.24 -0.32%
Volume: 0.00
Oct. 18, 2019 5:50p
loading...
/zigman2/quotes/211618636/realtime
XX : Dow Jones Indices
3,237.81
-3.51 -0.11%
Volume: 0.00
Oct. 18, 2019 1:14p
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