Month: February 2026

VaR Shocks — Anatomy of a Forced Deleveraging

/ mtlucasmacro
A digital stock market chart displaying fluctuating graphs in red and green, with lightning bolts striking across the image, suggesting volatility.

Every now and then the market reminds you that the most dangerous risks aren’t the ones you can see coming. They’re the ones embedded in the risk management systems themselves. Value-at-Risk (VaR) shocks are one of those paradoxes in finance where the tools designed to keep portfolios safe can end up making everything worse. Understanding how they work, and why they matter, is essential for anyone managing leveraged portfolios or trying to make sense of the violent dislocations that periodically rip through markets.

The basic idea is straightforward enough. Many portfolios size their positions based on some measure of expected risk – typically volatility, asset correlation, and the resulting VaR. In calm markets, volatility is low, correlations are well-behaved, and risk models give you the green light to run bigger positions. Life is good, until something upsets the apple cart. Volatility spikes, correlations jump, everybody’s risk model says the same thing at the same time – cut risk.

Below is a deliberately simplified illustrative simulation to walk through the mechanics of a VaR shock. Think of it as a stylized version of what happens in the real world when a stress event hits a volatility-targeted portfolio, whether it’s a risk parity fund, a sector and factor neutral fund, a spread trader or a trend follower. Any leveraged strategy that dynamically adjusts exposure based on realized risk metrics.

We use two assets, each running around 15% annualized volatility in normal times, with correlations near zero. The portfolio targets a 15% volatility max and sizes positions accordingly. With two uncorrelated assets at 15% vol each, the math is generous as the diversification benefit from near-zero correlation means you can hold around 70-80% in each asset (roughly 1.5x total exposure) and still run portfolio-level volatility comfortably below the 15% limit, closer to 10%. That’s the beauty of diversification working as intended. Low correlations give you leverage capacity for free. The risk model sees calm vol, calm correlations, and allocates accordingly. Everything is in equilibrium. Now let’s break it.

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Are Your Alternatives Actually Just Equalatives?

/ mtlucasmacro

Let’s be honest about what’s sitting in most “Alternatives” buckets. Privates.

Private equity is a company raising capital from investors to build and grow their business. Public equity is a company raising capital from investors to build and grow their business. The only real difference? The platform they raise money on. Same story with private credit versus public credit, it’s lending to companies either way.

These aren’t alternatives. They’re “Equalatives”—a made-up word for investments that appear different but are exposed to the same economic drivers as what you already own.

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Macro Thoughts – January 2026

/ mtlucasmacro

Politics still loom large. The U.S. midterm elections likely act as a catalyst for further action by the current administration, particularly around affordability pressures. We expect that the President will campaign as if it were a Presidential race, with renewed efforts aimed at lower oil prices, lower mortgage rates and very visible support for consumers. Importantly, parts of the OBBBA were explicitly back-loaded: tax measures and refund dynamics designed to boost household cash flow this year, alongside corporate incentives intended to pull forward capex – and would anyone be surprised by a Trump signed tariff refund check? As those measures begin to hit, there is scope for a pickup in activity that could be powerful. The key economic question we’d love to grill the new Fed chair on: how sensitive is the economy to lower rates, should they come, and how does that interact with the AI-driven productivity gains we’re surely seeing? (The past couple of months look like yet another step change with agentic workflows) Technological change reshapes what work looks like, many jobs will surely transform and many new industries will get created. Same as it ever was.

The biggest question of the age remains unanswered. It seems clear enough to us from the US side; no longer willing to bear the large cost of absorbing the massive trade surpluses created in China and is reshoring and retooling to deal with it. Europe (via the Draghi report on competitiveness) seems to have woken up. At Christmas I broke the board games out at home. Couple of classics, Hungry Hippos and Risk. The combination of those strikes me as a rough model for the geopolitical environment. Take the marbles out of Hungry Hippos and replace them with the countries from the Risk board. The US and China are both hitting the hippo as hard and as fast as they can to get countries on their side and locked into their sphere of influence for trade, security, manufacturing and energy resources. Venezuela, broader Latin America, the Middle East, Asia, parts of Europe and Russia shifting (and being shifted) into trading and alliance blocs, all with the ability to move markets on short notice. The ball looks to be in China’s court. How this great confrontation plays out is the central theme of the next decade or so, making for an incredibly interesting set of macro opportunities.

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