STOCKS | Parallax Volatility Advisers Warns Equity Dispersion Trades Face Painful Reversal

Parallax Volatility Advisers CEO Will Bartlett said investors enjoying the current boom in equity dispersion trades should prepare for a painful market shift, calling the strategy “a ticking time bomb” and saying a blowup was only a matter of time. According to Sina Finance, dispersion trades bet that a basket of stocks or an index such as the S&P 500 will remain stable while individual stocks move more sharply and independently; the strategy has grown popular among multi-strategy firms as stock correlations have declined. Bartlett compared current conditions with those before the 2011 eurozone debt crisis and said many traders lack experience with how the market could behave in a downturn. Adapt Investment Managers examined crowded-trade scenarios in a report earlier this year, including how liquidations by smaller portfolios could trigger larger portfolios to unwind and amplify market impact. Correlations have risen from their midyear low but remain well below average, Bartlett said, adding that a significant increase would make dispersion trades painful.