Many investors stand bewildered with what to do given the current hyped volatility and as we turn to absorb media data points, it appears chaotic as equities sold off sharply for the year. But is this volatility new? Is this a sign?
The first chart below shows almost 50 years of the S&P500 daily percentage moves.
What it illustrates is the recent volatility, while perhaps uncomfortable, is not atypical. It looks a lot like volatility in 2010, 2011, 2014, 2015 etc. If you look closely, you may notice that volatility has been low over the last 9 years.
Looking at the second chart, since 2017, it shows there is indeed some incremental volatility of daily movements – but again, by no means extraordinary. So where does this leave us?
We believe volatility is likely to be upon us and rising for some time. We have written many times that the volatility measures such as VIX have been artificially low and importantly not representative of risk. The VIX started 2018 under 10, averaged 16.6 and left the year at 25. With the long term average since 1995 of 21 and 18 since 2009, we think it is more likely to be closer to average than it has been lately.
Given the direction of equities in 2018, this also highlights an important reality about equity volatility: most of the volatility is on the down side. This phenomenon is called negative skew and it means that the downside volatility is typically greater than the upside – kinda scary right?
A recent example of negative skew is the big down month experienced in December (-9.2% S&P500, -9.5% Nasdaq). However, there is a solution in investment strategies that are positive skew: that is higher upside volatility than downside. CTA strategies are less likely to have these large down months and are indeed positive skew and have beneficial volatility. An additional benefit is that CTA strategies also have a low correlation to negatively skewed investments like equities. This is why adding CTA exposure to an equity portfolio typically lowers volatility and improves risk adjusted returns.
For more about the Auspice CTA strategies and the potential portfolio benefits, please give us a call.
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Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
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