Resist temptation to ‘buy the dip’, says GLG

Flamand: I think what we have seen in the past week could continue for some time

by BLOOMBERG

LONDON • Pierre-Henri Flamand, the CIO of Man Group plc’s GLG unit, said market swings could continue and warned against a tendency to “buy the dip” after a correction in global markets.

“The instinctive inclination to ‘buy the dip’ may be strong,” said Flamand in an emailed response to questions from Bloomberg. “As the past week has shown, this may not work so well. Indeed, I think what we have seen in the past week could continue for some time.”

The CBOE Volatility Index had its biggest single-day rally on Feb 5 as inflation worries led to a spike in bond yields and a plunge in global stocks. Investors buying up securities after the tumble were hit when the S&P 500 Index resumed the decline later in the week, ending the five-day period down 5.2%. The speed of the reversal has challenged the oft-repeated maxim that investors should “buy the dip” as market signals are increasingly difficult to parse.

GLG is a unit of Man Group, the world’s largest publicly traded hedge fund unit, which itself wasn’t immune to turmoil from the market sell-off as one of its main hedge funds fell about 4.6% on Feb 5.

Many of GLG’s strategies have taken defensive positions recently, Flamand said, declining to comment on the performance of specific funds. GLG oversaw US$32.9 billion (RM129.6 billion) globally in hedge funds and long-only strategies as of September, according to its website.

Active strategies, particularly those combining market-neutral and factor-neutral strategies, will be one of the best ways to hedge against a downturn, he wrote in the email. Market-neutral strategies attempt to avoid market risks, often by matching bullish and bearish bets. Factor neutral strategies seek to weigh factors such as market exposure, company size, value and stage of growth.

Richly valued markets such as technology stocks could be the hardest hit in the downturn, Flamand said.

Seeds were being sown for “a particularly vicious correction”, Flamand said in a January commentary before the market rout. At the time, he said the market appeared to be moving into the fifth stage of Ralph Nelson Elliott’s wave model of technical analysis of market trends, in which everyone stands firmly behind the positive news.

“The current period of stability has overtaken 1965, and only once since 1920-1995 has the market enjoyed a longer run without a 5% fall,” he wrote in the commentary. “While the fifth wave can last for weeks, months or even years, it inevitably precludes a significant market correction, on average giving up between 38% and 50% of all gains.”

In the email, Flamand said he is looking out for signs that the market correction will spread to different asset classes, rather than being limited to an equity sell-off. If higher inflation over time prompts an increase in bond yields, finding investment havens other than cash will be more challenging, he said. — Bloomberg