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What Will Happen When the Music Stops Playing?

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May 28th, 2019




Andreas Bezner

The last two decades have brought the dotcom bubble, the global financial crisis, the European debt crisis, and flash crashes to name a few which resulted in losses of more than 50% of capital for several asset classes.

Traditional investments such as mutual funds that invest in the assets depicted in the graph have become a popular way to participate in upswings of the economic cycle.

Will there be a chair left for everyone?

A ten-year equity bull market fueled by low (or negative) interest rates has made even professional investors endlessly optimistic, and some might say, even reckless. Given the current high market valuations across almost all assets, the risk of a market correction, or even a crash, has become more likely. What makes the current scenario scarier than, say, ten years ago, is the recent rise of automatic trading programs which tend to sell automatically when certain thresholds are breached. According to our data, the level of such automation on certain stock exchanges has reached levels of 60% and above. Which means that should a crash occur, the ensuing fire sale might be even more violent compared to the days when humans alone panicked about losing their shirt.

One or more of the below symptoms (loosely based on a chart by UBS from the 2000s) may point to an impending bubble:

  • Rapid market growth 

  • Cheap money 

  • High valuations 

  • Unrealistic return expectations

  • Excessive leverage 

  • Frantic M&A activity 

  • Mass media coverage 

  • Everone’s invested and bragging their gains 

Stableton’s approach to Alternative Investments

We agree with US comedian Will Rogers who famously stated that he was more concerned about the return of his money than with the return on his money. The proper implementation of an absolute return strategy does not only entail a significantly lower risk of a significant capital loss – as there is no rigid link to a benchmark – but also usually also considerably more calculable investment results.

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