The Globe and Mail reports in its Thursday edition that Melissa Brown, managing director at quant player Qontigo, believes there are "unknown unknowns" embedded in the U.S. stock market. A Reuters dispatch to The Globe says that to highlight this, she shows a rising "risk spread" between fundamental models of risk and statistical models derived from market pricing and dynamics. That spread returned earlier this year to peaks not seen since April, 2009. Although it is off its highs since, it remains well above averages for the 40-year series. "We believe this indicates that the statistical models may be 'seeing' a risk not captured by our fundamental models," Ms. Brown wrote. "Could it be 'concentration risk'?" Ms. Brown says that it may be concentration of portfolios in the narrow leadership of so-called "magnificent seven" leading U.S. stocks (Apple, Microsoft, Amazon, Alphabet, Meta, Tesla, Nvidia) and the wider index implications of a shock in any one of them that is now a possible curveball. Hedge funds held record exposure to these seven stocks last month. Ms. Brown concludes, "As both the macro and geopolitical environment remain unpredictable, the probability of a risk event trigger remains larger than normal."
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