The dramatic and well chronicled crisis of 2007/8 marked a
watershed moment for all stakeholders in global capital markets. In
the aftermath, financial markets have become even more tightly
coupled as correlations in returns across multiple asset classes
have been at historically elevated levels. Investors and fund
managers are, to a much larger degree than previously and often
much more than they realize, subject to the risk of severe wealth
destruction. The ultimate hazard, which is not adequately
characterized by the widely touted notion of tail risk, is the
systemic risk which arises when liquidity in markets completely
evaporates. Not only did this happen in the second half of
2008, but it has been repeated episodically since then - most
notably in May 2010, in an incident known as the Flash Crash, and
in the fall of 2011 when correlations were at historically elevated
levels.

Conventional asset allocation tools and techniques have failed
to keep apace with the changing financial landscape which has
emerged since 2008. In addition to the preponderance of algorithmic
trading and the associated changes in the liquidity characteristics
of financial markets, a new paradigm of risk on/risk off
asset allocation has emerged. Risk on/risk off is a widely
adopted style of trading and macro allocation strategy where
positions are taken in several closely aligned asset classes
depending on the prevailing sentiment or appetite for risk.
The consequences of the day to day (and intraday) switching between
either a risk on or risk off tactical strategies poses significant
new challenges to investors who are still making investment
decisions with outmoded notions from traditional asset allocation
theory.

How can one cushion the impact of systemically threatening
events when the ability to exit financial instruments becomes
almost non existent? How can one trust the integrity of financial
models and orthodox macro financial theory which have become
increasingly discredited? Can central bankers be relied upon to
become the counter-parties of last resort and provide a safety net
under the financial system? These vital questions, and many
others, need to be addressed by everyone who has a stake in modern
financial markets, and they are addressed in Systemic Liquidity
Risk and Bipolar Markets.

Proper functioning markets require fractiousness or divided
opinion, and this needs to be lubricated by communications from
central bankers, economic forecasters, corporate executives and so
on. As long as such messages and market conditions remain
ambiguous, providing asymmetric information to different market
players, then the conditions are present to enable systemic
liquidity to be preserved. Seen in this context the prevailing
paradigm of bipolar risk on/risk off asset allocations is
both a prerequisite to liquid markets, and also paradoxically, when
one side of the polarity becomes too extreme, a major source of
systemic instability. Should such polarities become
critically unbalanced, and should the signals received by market
players become symmetrically disadvantageous as they were in the
fall of 2008, then an even more substantial systemic liquidity
crisis than that seen in those troubled times is a dangerous
possibility.

Apart from the practical risk management tools and tactics that
are recommended in Systemic Liquidity Risk and Bipolar
Markets, there is a provocative and cogent narrative to provide
anxious and perplexed investors with a coherent explanation of the
post GFC financial environment, and which should assist them in
navigating the choppy waters ahead.

Clive Corcoran has been an independent trader, on both sides of the Atlantic, for more than 20 years. In recent years he has been engaged as a course developer and tutor, providing international executive education workshops and individual mentoring. He is also an FSA registered adviser and provides wealth management services and investment advice to private clients. As an author he has written Long/Short Market Dynamics: Trading Strategies for Today's Markets (Wiley, 2007) and several titles for the Chartered Institute for Securities and Investment (CISI). He has been a regular analyst/contributor to CNBC Europe and other broadcast outlets, runs executive education workshops in conjunction with Euromoney, ICMA and Thomson Reuters, and has been a featured speaker at international trading and investment expos.

The dramatic and well chronicled crisis of 2007/8 marked a watershed moment for all stakeholders in global capital markets. In the aftermath, financial markets have become even more tightly coupled as correlations in returns across multiple asset classes have been at historically elevated levels. Investors and fund managers are, to a much larger degree than previously and often much more than they realize, subject to the risk of severe wealth destruction. The ultimate hazard, which is not adequately characterized by the widely touted notion of tail risk, is the systemic risk which arises when liquidity in markets completely evaporates. Not only did this happen in the second half of 2008, but it has been repeated episodically since then most notably in May 2010, in an incident known as the Flash Crash, and in the fall of 2011 when correlations were at historically elevated levels.

Conventional asset allocation tools and techniques have failed to keep apace with the changing financial landscape which has emerged since 2008. In addition to the preponderance of algorithmic trading and the associated changes in the liquidity characteristics of financial markets, a new paradigm of risk on/risk off asset allocation has emerged. Risk on/risk off is a widely adopted style of trading and macro allocation strategy where positions are taken in several closely aligned asset classes depending on the prevailing sentiment or appetite for risk. The consequences of the day to day (and intraday) switching between either a risk on or risk off tactical strategies poses significant new challenges to investors who are still making investment decisions with outmoded notions from traditional asset allocation theory.

How can one cushion the impact of systemically threatening events when the ability to exit financial instruments becomes almost non existent? How can one trust the integrity of financial models and orthodox macro financial theory which have become increasingly discredited? Can central bankers be relied upon to become the counter-parties of last resort and provide a safety net under the financial system? These vital questions, and many others, need to be addressed by everyone who has a stake in modern financial markets, and they are addressed in Systemic Liquidity Risk and Bipolar Markets.

Proper functioning markets require fractiousness or divided opinion, and this needs to be lubricated by communications from central bankers, economic forecasters, corporate executives and so on. As long as such messages and market conditions remain ambiguous, providing asymmetric information to different market players, then the conditions are present to enable systemic liquidity to be preserved. Seen in this context the prevailing paradigm of bipolar risk on/risk off asset allocations is both a prerequisite to liquid markets, and also paradoxically, when one side of the polarity becomes too extreme, a major source of systemic instability. Should such polarities become critically unbalanced, and should the signals received by market players become symmetrically disadvantageous as they were in the fall of 2008, then an even more substantial systemic liquidity crisis than that seen in those troubled times…