Style drift.

As Central Banks plump their balance sheets with treasuries and mortgage backed securities (and stock market ETF shares … Japan), we should expect to see a push out the risk curve as investors seek yield.  I’ve written about this before.  I’ll be writing about it more, because it makes me nervous.

In trading, smart risk management teams keep an eye out for what we call “style drift”.  Essentially, a trader is good at trading one thing, opportunities in that strategy/market become harder to come by, so the trader starts changing.  He adds more leverage to the same strategy, or he removes some of the hedge (increasing return by lowering the cost of the hedge), or he drifts into ancillary markets (“I know a lot about trading oil, so I probably can make some money in distressed debt of downstream oil and gas companies” … that’s a big leap, but it’s in the right direction).

Continue reading “Style drift.”