Volatility Presents Hidden Risk to Hedge Fund Returns

According to recent research from Robeco Asset Management’s David Blitz: “hedge funds have hitched their wagon to stocks with large equity-price swings—a misguided strategy over the long haul.” These findings were reported in a recent Bloomberg article. In an interview, Blitz said, “The fact that hedge funds are positioned like investors in high-volatility stocks, this does not contribute positively to their returns.” Blitz says that moving away from a low-volatility factor represents one of the… Read More

Stocks are Showing More Volatility

Investors are seeing more volatility than they expected in the stock market this year, according to a recent CNBC interview with LPL Financial’s Ryan Detrick (outlined in CNBC.com). According to Detrick, the article states, “markets have not seen moves this wild since the financial crisis.” Citing the threat of a trade war and dips in tech stocks as contributing factors, the article compares recent market turbulence to the run of volatility the market saw back… Read More

Buying Stocks with Debt Leads to Market Vulnerability

Analysts warn that the increase in margin loans—borrowing to buy stocks—exacerbated the selloff that occurred at the end of last month and that, if such debt levels continue to rise, it could lead to more market volatility. This according to an article in The Wall Street Journal. The article cites FINRA data showing that retail and institutional investors have borrowed a “record $642.8 billion against their portfolios” in an effort to participate in stock market… Read More

Are Risk-Parity Funds Responsible for Recent Market Selloff?

Risk-parity funds, intended to balance portfolios based on asset volatility, were partially blamed for the market’s recent price swings. This according to a recent article in The Wall Street Journal. By “limiting bets on more volatile assets like stocks and commodities and using leverage to load up on safer assets like government bonds,” risk-parity funds attempt to minimize risk of collapse of any one market, the article explains. The strategy, it says, pioneered by hedge… Read More

Three Things to Remember When Markets Decline

By Jack Forehand (@practicalquant) —  “People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”  — Peter Lynch, One Up On Wall Street Market volatility is back. And with it comes a significantly elevated potential for rising emotions and the poor decision making that comes with them. For investors, now is as good a time as ever to take a step back… Read More

The Realities of Mean Reversion

By Jack Forehand, CFA (@practicalquant)  “Importantly, reversion to the mean in the investment business extends well beyond the results for mutual funds. It applies to classifications within the market (small capitalization versus large capitalization, or value versus growth), across asset classes (bonds versus stocks) and spans geographic boundaries (U.S. versus non-U.S.). There are few corners of the investment business where reversion to the mean does not hold sway.” – Michael Mauboussin Mean reversion is one of… Read More

Stock Market Lessons Learned in 2017

By John Reese (@guruinvestor) — Over the past twelve months, we’ve seen the bull market continue to trudge ahead with highs in many U.S. indexes and growth in various sectors and industries. With the news of major tax reform comes optimism for continued corporate earnings strength. That said, however, there are also growing concerns regarding an overvalued market and a potential correction. Let’s review what we’ve learned over the past twelve months: Bull markets don’t… Read More

Volatility May Be Down but Ambiguity is Up

A “new measure of market fear” indicates that investors might be more skittish than the current volatility gauges suggest, according to a recent article in The Wall Street Journal. The article reports: “The gauge of so-called ambiguity, meant to chronicle the degree of uncertainty investors have in the probabilities they use to make decisions, has been at all-time highs in recent months, indicating that there’s more fear built into the stock market than common measures… Read More

Swensen of Yale Endowment: Low Market Volatility a Worry

David Swensen, chief investment officer of Yale University’s endowment fund, is concerned that low market volatility could lead to another market crash, according to a recent Bloomberg article. During his remarks at the Council on Foreign Relations in New York earlier this month, Swensen said, “When you compare the fundamental risks that we see all around the globe with the lack of volatility in our securities markets, it’s profoundly troubling.” According to the article, Swensen’s… Read More

Low Volatility Could Be a Safety Net

The CBOE Volatility Index (VIX) has been well below its long-term average (of around 20), according to a recent article in Barron’s, which suggests that this might not necessarily be a bad thing for the stock market. The article says that, given the world’s current state of chaos, we might expect volatility to be higher. But the VIX, it says, is based on investors’ perceptions of “perceived certainty—or lack thereof”—regarding future returns,” adding that analysts… Read More