Seasonality: summer spread and portfolio valuation

The phenomenon occurred, punctually, also this year. With the entry into the heart of the summer season, the decrease in liquidity caused by the contraction of trading activities has widened the bid-ask spreads (demand-offer) creating conditions conducive to investing in a fund. A phenomenon that is well known to financial market operators who, in fact, in these times and net of exceptional situations, increase their positions.


For the benefit of the less experienced, bid-ask spread identifies the difference between the asking price and the offer of a security. It shouldn't be confused with the comparison between the yields of Government bond of, ie, European Peripheric countries and the German Bund, now synonymous of a risk index and commonly referred to as "the spread".


The widening of the bid-ask spread has a technical origin. Funds represent (or should represent) the value of securities at mid-price (halfway between the bid and ask prices) to offer all investors a fair valuation. When market's activity, for reasons attributable to the seasonal intensity of the underlining trading (and not originating, therefore, from economic facts), is slower than usual, bid and ask price separate wider. In detail, this is due to a number of reasons all fundamentally linked to how brokers manage their books and risk.

Consequently, the mid-price necessarily moves away from the "normal" ask price (offer), opening a window of opportunity of investing in securities at a mid price further from ask than in normal times. Furthermore, if the seasonal factor comes with situations that give rise to volatility (as happened, for example, during the 2011 Euro crisis), the opportunity is even greater.


How much is this opportunity potentially worth and for how long does last? The quantification varies according to the different asset classes contained in the fund. In high yield corporate bonds, for example, this spread is max and may temporarily widen further by 40 / 50bps while it is negligible in the case of more liquid equities. It is clear, therefore, that the investment opportunity is especially valid for funds with an at least partially corporate bond portfolio.


As for the duration, the window tends to gradually close with the return to normal liquidity levels which, typically, are recorded in autumn and spring, when the situation can even reverse, pushing the mid-price in a territory that creates the ideal conditions for redemption odds (maximum distance from the bid).


It is time for the long-awaited vacation for most and, for investors who are wondering what is the best timing to re-enter the market, the favourable dynamics of the bid-ask spread can be a factor to be considered beyond any evaluation of current trends.



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Simplify is an AIF umbrella fund, is authorised by CSSF in Luxembourg and passported in Italy and Sweden. The fund is managed in London.