Sep

14

 Twenty three years ago, when I was more stupid than I am today, I stood beside my Senpai on the floor.

He had just been given (had sold to him) the equivalent of 2000 contracts in the Australian Share Price Index futures market. This was a sizeable position forced upon him and the market was immediately well lower with no bids. All of a sudden he started buying short dated interest rate futures.

What was he doing? As the colour drained from my face and I metaphorically soiled my shorts, he found the bids in the SPI and then covered his longs in the interest rate futures. Nett he lost small but only about 20% of what he would have lost just covering in the core market.

During my post trade inquisition he told me there was no liquidity in SPI so he 'hedged' in the next best liquid instrument. He subsequently did this scores of times and later when the student became the master he did too. He kept manual records of reactions of the local markets to one another in 30 minute increments and used it as a 'hedging cheat sheet'.

But that was in the 1990s, that was before the Internet, when promoters of dying strategies in warm climates raised billions–before the best and brightest lost interest in the world.

It is interesting to note how things that used to be excellent short term 'hedges' have lost much (if not all) of their efficacy. One notes the much reduced to useless hedging effectiveness over the past decade or more of:

The Swiss Franc, Gold, Short Dated Interest Rates, Options based markets: Like all insurance products the spreads to exit during the panic right at the low in the futures market - that the option was purchased to protect against or profit from - are so wide as to make it not worth the bother - better to stick with the futures.

It is changing 'Baconian' cycles, it is government & central banks learning the game (the ruthless and gifted Swiss National Bank is the absolute master), it is interest rates at zero, it is technological advancement and it is - in some way - 'natural' and just that what was once done so well by the true masters has been traded away into nothingness by the smarter student.


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