An August 13 posting on FT Alphaville included graphics from a Bank of America Merrill Lynch fund manager survey. The third one showed the results for this question: “What do you consider the biggest ‘tail risk’?”
While down from more than 55% in July, the August survey showed more than half of the managers thought the answer was “China hard landing & commodity collapse.” The next highest vote-getter was 16%.
The chart above shows the June spike in SHIBOR (the Shanghai Interbank Offered Rate), the big move higher in the China CDS spread, and the drop in the Shanghai Composite. No wonder the fear was there — which apparently was a good signal to load up.
Look what has happened. SHIBOR collapsed, the CDS spread fell almost by a half, and the Shanghai market found its legs. So, too, did other risk markets around the world as the burden of that fear was lifted at least for now.
The managers are back to chasing the tail instead of fearing it. (Chart: Bloomberg terminal.)
The header says “new research puzzle,” but it’s actually from a few weeks ago, first referenced here now because pix was on hiatus when it was published. The essay looked at the paradox of choice, popularized in a book of that name by Barry Schwartz. It delved into the world of “maximizers” and “satisficers” as it relates to investments (think active and passive), and it will be followed soon with chapters on what the overwhelming choices in the investment world mean for the buyers and sellers of investment products.