Volatility strategies per se are among many that may profit from a more volatile climate or even provide tail risk insurance. Cole expects that an inflation shock could be the trigger factor. Societe Generale sees risks of a recession by 2019 or 2020, and thinks that the profit cycle could be peaking (this view was not shared by all speakers Caxton Associates’ Associate Partner and Portfolio Manager, Vishnu Kurella, sees “no indication of recession around the corner”).įor Cole, “the market action seen in February 2018 – triggered by a mere 40 basis point rise in rates – is only an appetiser for a main course of further equity volatility should rates spike 1% to 2% higher as they have in other reflationary periods”. Only $60 billion is in explicit short volatility strategies, but other strategies including risk parity, variance control and risk premia also replicate the dynamics of short volatility”.Ĭole also views equity investors as complacent, and claims that “US equities would be in an earnings recession without share buybacks – which also reduce volatility”. He believes that “$2 trillion of financial strategies are explicitly or implicitly short of volatility. She judged that “the focus of monetary and fiscal policy is no longer volatility control, and the regime has changed from euphoria to anxiety”.Īrtemis Capital Management LP founder, Christopher Cole, contends that the sheer volume of institutional money positioned for short volatility has begat lower volatility in a reflexive cycle that could easily upend into an upward spiral for volatility. Ten-year break-evens on inflation linked debt could easily move up by a percent,” said Komileva. A whole host of factors that have kept inflation low – labour reform, globalisation, little unilateral currency devaluation, technological innovation, demographics, and a cyclical undershoot in the jobless recovery no longer apply. “The output gap has already closed in the US and Germany and may do soon elsewhere in Europe. Higher rates could have greater impact because “non-financial debt as a percentage of GDP has surpassed pre-crisis levels in China and the G20,” she mapped out.įaster inflation also seems probable. “February 2018 saw financial conditions turn negative for the first time since February 2015 which preceded a major stock market correction, and the IMF’s Financial Stability Review has identified medium term vulnerabilities rising,” she added. The ECB’s QE policies have had effect through multiple channels – credit, currency, interest rates, duration, and signalling” – all of which could back-pedal. The Fed is withdrawing $1.5 trillion of QE, of which $380 billion is coming this year. Trade wars are another risk, pointed out by Lena Komileva, Chief Economist at G+ Economics, who also reckons that “markets are complacent about central banks ending quantitative easing for the first time in a decade. Non-financial debt as a percentage of GDP has surpassed pre-crisis levels in China and the G20. His findings could heighten political tensions outside the region. Veteran war reporter, Robert Fisk, said he is investigating the provenance of weapons used by Isis and Nusra. Rodriguez, Managing Partner of AZR Capital, spotlighted that geopolitics and domestic politics are heating up, with far-right politicians winning power in multiple countries while the Middle East faces dictatorships, civil wars and chaos. There are always Cassandras calling for crises, and a stopped clock must be right twice a day, but in early 2018 it seems that a range of risk factors are coalescing to ramp up volatility.Įvent chair, Maya A.Z. The Hedge Fund Journal nearly always attends the London day and here we review highlights from a very candid discussion amongst leading hedge fund managers of volatility and other strategies, economists, exchanges, brokers, allocators, academics and other market participants. The London event held on April 12th, 2018, generated $106,000. The annual Volatility and Tail Risk Educational Events (held in Sydney, London and Zurich) have raised more than $500,000 for charities such as VIMBA, Woman’s Trust, Vision for a Nation and Beanstalk.
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