Tactics to Tame Volatility and Reduce Portfolio Correlation – ValueWalk Premium

Tactics to Tame Volatility and Reduce Portfolio Correlation

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Q2 2020 hedge fund letters, conferences and more


The “new normal” Is anything but…

As markets and the analysts who follow them struggle to find clear direction amidst the continued widespread economic and social impacts of the coronavirus, investment professionals tasked with achieving alpha and controlling portfolio volatility face even bigger challenges. As stocks climb in spite of economic weakness into what could be another grey swan event in November, advisors need to employ fresh tactics as some traditional approaches lose effectiveness.

The abrupt correction in March 2020 and subsequent volatility serves as a poignant juxtaposition to the behaviors of the previous decade that produced the longest and calmest bull market in 100 years (average VIX reading for the decade was 16.86% vs. 82.69% at the peak of the COVID-19 initial shock). Even after the current rally that has sent the NASDAQ back into record territory, the VIX index is still trading at roughly a 70% premium to where it averaged in the fourth quarter of 2019 and prior to its February 2020 spike. The pandemic is not only triggering a shift in our social habits, but in how leaders around the world model economic growth, logistics and potential tail risks, such as complete government shutdowns or abrupt shipping halts. All of those factors will contribute to tangible, dramatic modifications in the behavior of asset classes.

This massive shift in market conditions also comes at a time when the world’s foremost economists and analysts were already calling for a dramatic rethinking of return profiles for many of the most common portfolio constructs, including allocation ratios and strategy utilization. Put simply, traditional mindsets, tactics and returns were already challenged, even without this new set of risks.

The rapid, unexpected onset of a recession and uncertainty also punctuates a need for a fresh approach to strategy, portfolio theory and even product pricing structures. Just as our culture is shifting to flexible, remote work, portfolios need to push new boundaries in agility and create better alignment between managers and investors. Conservative, income-seeking investors are especially challenged in this ultra-low interest rate landscape, which is widely expected to remain for the foreseeable future.

Read the full article here by Harvey Steele, Advisor Perspectives

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