H1 2025 Review – Trump Volatility and a Mini Quant Crunch

Heading into the second half of 2025 it is worth taking a moment to reflect upon what has been a turbulent first half for many. The ‘vibe shift’ characterizing the start of Donald Trump’s second term represented a turning tide. For the world’s media it has been a 6-month feeding frenzy with each hour delivering a fresh revelation on geopolitics, financial markets or statecraft. Trump’s second term saw a flurry of executive orders, a ~15% decline in the S&P 500 and subsequent recovery and the biggest dollar sell-off in the first half of any year since 1973. This has created a market regime characterized by rapid reactions to announcements from the administration (or even from social media posts) and flatlining prices in anticipation of the next policy position.

The problem presented by this “Trump” volatility is clear. In these conditions even the most sophisticated investor has little predictive power over future price returns and noise dominates the ability to decipher signals. Here, a larger slug of luck plays a part in outcomes, and while the media focuses on tariffs and the S&P 500 there was less obvious risk bubbling away beneath the surface in March.

Earlier this year the Governor of the Bank of England, Andrew Bailey, set out a case for multi manager hedge funds being a threat to financial stability, these ‘pod shops’ providing strategic freedom to portfolio managers but not patient capital. Mr. Bailey made the point that the willingness and speed with which individual pods close down, in combination with the prevalence of many independent portfolios – with even slightly overlapping positions, has the potential to generate a spiraling feedback loop as small portfolios follow each other into exits, with trades impacting prices in the direction of the trade inducing further unwinding.

We have heard this story before. In traditional markets this is a bursting bubble. And in this case the mechanism, and moniker to describe it, is crowding. A casual observer can point to previous examples of panicked exits leading to a crash such as the ‘Quant crunch’ of August 2007 as short term mean reversion players were hit with downward P&L moves that were many multiples of “normal” behavior. Regardless of the cause, the mechanisms behind such sell-offs are always the same: market participants head for crowded exits, drive prices further down, and pull previously secure participants into a deeper crash. Various central bankers and policy makers have also raised concern at the dangers of the heavily leveraged ‘basis trade’, the major players in the modern era the said impatient ‘pod shops’, that has particularly damaging potential in times of crisis.

The difficulties posed by the Trump volatility left some of the most successful multi manager players of recent years struggling in the first half of the year. As much as this underperformance is not meaningful on short time periods there was something amiss in March in various leveraged equity market neutral strategies, including short term mean reversion and index arbitrage. Both these strategies are relatively commonplace and leveraged and suffered large abnormal moves down at the start of that month amid mainstream news reports of pod shops pulling the plug on such strategies. This mini quant crunch, perhaps triggered by the Trump volatility, was likely exacerbated by these sudden exits. Avoiding these effects is non-trivial – reducing overlap by employing strategies that are completely different certainly helps. It is also worth noting that playing a long game and being patient has its merits – these episodes tend to self-correct once the storm is over, as was the case in March.

The increase in volatility through the liberation day gyrations of April saw this mini quant crunch go relatively unnoticed as the world’s attention quickly shifted. As we head into H2 the TACO narrative has seen markets shrugging off talk of impending tariffs with the VIX remaining low. That being said, the tariff can has been kicked to a historically and worryingly less liquid part of the year in August. The risk of Trump volatility and a repeat of liberation-day-like announcements remain, along with the danger of correlated unwinds in concentrated portfolios. Best to focus efforts in these quiet summer months on researching and finding more non-overlapping strategies!

We wish our clients and friends an enjoyable and liberating (northern hemisphere!) summer.

DISCLAIMER

Any statements regarding market events, future events or other similar statements constitute only subjective views, are based upon expectations or beliefs, involve inherent risks and uncertainties and should therefore not be relied on. Future evidence and actual results could differ materially from those set forth, contemplated by or underlying these statements. In light of these risks and uncertainties, there can be no assurance that these statements are or will prove to be accurate or complete in any way. All opinions and estimates included in this document constitute judgments of CFM as at the date of this document and are subject to change without notice. CFM accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. CFM does not give any representation or warranty as to the reliability or accuracy of the information contained in this document. The information provided in this document is general information only and does not constitute investment or other advice. The content of this document does not constitute an offer or solicitation to subscribe for any security or interest. All figures are sourced from CFM.