Systematic managers have materially reduced risk across multiple asset classes as geopolitical tensions linked to the Middle East conflict have intensified, according to analysis from UBS.
UBS strategist Nicolas Le Roux reports that CTAs have trimmed roughly 75% of their global equity exposure since the conflict began, a reduction that places them near neutral on equities. While the models indicate that CTAs still retain capacity to trim positions further, UBS expects the rate of liquidation to slow from current levels, with the deceleration most likely to show up in U.S. large-cap stocks. The bank also notes the potential for a modest shift in activity the other way, predicting "a little bit of CTAs buying in Chinese indices."
The note describes a pronounced unwind in rate-sensitive positions. After sizable duration purchases in February, CTAs reversed course in March, selling roughly 80% of the duration they had just accumulated during the first half of the month. Le Roux cautions that additional stress could follow if yields do not stabilise, estimating another $100 million to $140 million of global DV01 selling could occur under that scenario.
Credit markets have seen rapid and large-scale CTA exits as well. UBS quantifies expected CTA flows in credit at between -20% and -90% of average daily volume (ADV), a level of selling the bank believes will exert pressure on pricing.
Currency positioning has shifted materially too, with CTAs moving quickly to cover USD shorts. UBS estimates that between $150 billion and $175 billion of USD short positions have already been bought back, and expects an additional $70 billion to $80 billion to be covered in the coming two weeks. The bank highlights that assets characterized by negative beta and positive carry, such as the USD, are likely to remain in demand until geopolitical tensions subside.
In commodities, CTAs are reducing leverage amid rising volatility. UBS points out that while deleveraging is underway across the commodity complex, agricultural contracts still represent an area where CTAs have capacity to increase exposure.
Contextual note - UBS's observations are derived from its modelling and the commentary of Nicolas Le Roux. The firm outlines potential flows and where pressure on pricing may emerge if market conditions do not stabilise.