Andrew Claeys, head of systematic trading at Allspring Global Investments, discusses adjusting systematic strategies in volatile markets and he looks at risks surrounding Chinese stocks, known as American Depository Receipts (ADRs) or US bank-issued shares, whether the fears of delisting them from US exchanges could come to fruition and what it could mean.
Claeys also unpacks how his desk forecasts volatility for navigating headline risks; his views on the positive correlation between bonds and equities for offsetting risk and where he sees interesting opportunities for hedging in exotic trades.
Interview
Jo Gallagher So how are you adapting your investable universe and your systematic strategies in response to tariffs and economic uncertainty?
Andrew Claeys Our investable universes are pretty much set at the strategy level, so we do not really adjust our investable universe based on geopolitical events or market volatility. That being said, when volatility rises, we tend to lower our position weights in the portfolio and some of the systematic strategies. You can achieve the same outcome with a lower position weight in a high-vol environment, so I think that’s something that we’re always evaluating and looking to do. A lot of the systematic factors that are well-known and widely used have performed very well and as expected during the recent bout of volatility. Low beta versus high beta is one example that’s done remarkably well, so there hasn’t been a huge need for us to adjust or react to recent events.
Jo Gallagher There were concerns that some Chinese stocks could be delisted from US exchanges. What would that mean for liquidity, for investors, and what’s important to be watchful of there?
Andrew Claeys Given the recent events last week, it looks like that may be becoming less likely. But that would be a very disruptive event. My preference would be to look to hold the local line. They’re not going to delist Chinese stocks in China, but they may delist the ADRs (American Depository Receipts) and the Chinese stocks listed in the US exchanges. So if I had a position in one of these securities or ADRs in the U.S., I would look to convert them to the local lines or local shares. Another response might be to hold an ETF (exchange-traded funds) that holds local Chinese shares. Just so I’m kind of out of the way of this very binary risk that is hard to predict. It’s a pretty unprecedented event, you know, when MSCI removed Russia, that was similar, but a little bit different because it was the local shares and not the ADRs. I think given that we’re talking about ADR’s and not local shares, that makes it an even riskier proposition if it were to come to fruition. So I would advise people to look closely at their exposure and their positions.
Jo Gallagher A big part of your job is making predictions about volatility. How do you forecast volatility and carve out opportunities and equities in this environment?
Andrew Claeys We have several systematic models that we use to predict volatility across various investment and asset classes. We also forecast volume, and those two tend to be highly correlated. One thing any investor could do would be to use historical volume and volatility or a forecasting model and create a ratio of volume to volatility, and that ratio could be used to kind of rank order assets within an asset class or across asset classes to judge how favorable liquidity conditions are at the moment. If volume drops off and volatility is persisting, it’s going to be a very challenging environment to execute large trades without very high transaction costs or adverse results. Another thing you could focus on is your interval participation rate. I think if you really set up your positions and target at interval participation rate that lines up with a historical cost number that you think is reasonable, and also a timeline, you’re going to be in a much better position to navigate this kind of headline-driven market that we’ve been in for the larger part of this year.
Jo Gallagher Earlier this year a big topic of discussion was this positive correlation between equities and bonds. Is this still problematic for de-risking and how do you see this playing out?
Andrew Claeys It’s difficult to say whether the correlation is going to increase or kind of remain in line with historical levels. What’s driving the correlation, is basically the onset of higher structural inflation in the US. If that occurs and when it looks more likely, you’re seeing equities and fixed income respond both in the same way. So U.S. Treasuries no longer offer that same flight to quality. Given the positive news over the last few weeks on the tariff negotiations and financial markets in general, that correlation has come down a bit. Given the news out of the BOJ (Bank of Japan) this past week about using their treasuries as a negotiating tactic in trade negotiations, I don’t think you can kind of close the door that higher rates or higher correlations between equities and treasuries could exist in the future. So, there’s quite a few ways to hedge that, primarily in the exotics. A trade that caught my eye was a dual digital option on S&P 500 and at the money SOFR rates. So if you bought a put that’s 5% out of the money in a three-month tenor, contingent on SOFR rate being 50 basis points or higher over the three months, the dual digital is about 8% upfront premium compared to the two outright options on the individual assets at about 20%. That’s a pretty significant discount and spending 8% upfront premium for a trade that pays out at one. Offers a lot of leverage from a hedging perspective. So if that correlation between rates and equities is something that you’re concerned about, that’s a very cost-effective way to mitigate that risk with a tremendous amount of leverage.
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