Displaying items by tag: volatility
To say investors are worried about the volatility in their portfolio in the current environment would be putting it lightly. The stock market gyrations are putting investors and their advisors in a difficult place. One way to manage volatility is to help clients calculate the Value at Risk for stocks or their whole portfolio. While VaR often is thought of as a heavily quantitative endeavor it's simpler in implementation than advisors might imagine, and only a small amount of statistics is necessary to calculate the VaR. It is a handy metric because it's a good gauge of the volatility underlying securities, and can help communicate and find better securities for investors.
Finsum: VaR is pivotal to forming long-short positions for clients and is an excellent addition to an advisor's portfolio of tools.
Actively managed exchange-traded funds are seeing an influx of interest as investors are concerned about the escalating market volatility. Active funds are touting their advantages of weathering volatility by making better day-to-day shifts at the portfolio level. One advantage active portfolio managers have is selecting areas where they can have an edge or avoiding places with the most volatility. For instance, tech stocks are down nearly 30% depending on which index you may be looking at. Volatility is expected to continue for the near term as the Fed is projecting another 75 bps hike in the upcoming meeting and a recession is hoving over the economy like a black cloud.
Finsum: Passive ETFs may be contributing to excess volatility according to breaking financial research; it makes sense investors would turn to active funds.
Recession, inflation, and interest rate volatility are reaching 40-year high levels of risk which has investors changing things up and ditching the 60/40 portfolio split. Whatever risks investors thought were present in their portfolio 6-months ago are drastically different today. Investors desperately need to re-allocate and re-balance that risk to a more suitable set of investments for the second half of 2022. Investors should look to more alternative investments because there is high-interest rate volatility. In fact, the US has dropped into a recession in over 75% of tightening cycles since the great depression. Generally, these tightening cycles increase the correlations between bonds and equities and hurt the cushion bonds normally bring.
Finsum: Advisors need to think outside the box to prepare for volatility in this cycle.
There is no hiding the huge influx in passive investing over the last couple of decades as a direct result of the ETF boom, but the rise in passive investing is causing more market volatility according to a new academic study. Theoretically with more passive investors active traders will become more aggressive and individual stock demand should be unchanged, but according to the study by UCLA it has increased market vitality and reduced efficiency. Even the skyrocketing number of algorithmic traders can’t offset the passive investors. Markets have far fewer signals and traders to rely on to gain underlying information about a stock, which creates an empty void that is filled up with volatility. Moreover, the paper speculates that as more ESG funds popup this will exacerbate the passive volatility problem.
Finsum: Passive investing has surely increased the average trader's utility, but it comes at the cost of a more efficient market and higher future volatility.
Hedge funds are one of the leading experts in volatility management, which is exactly why their latest moves might surprise people as they move into crypto and other digital assets. According to a report from PwC the number of hedge funds investing in digital assets is up to a third, and 11% higher than the previous year. It’s hedge funds' specialty and their namesake that they can utilize similar tactics in traditional markets in digital ones to mitigate risk in their digital exposure through derivatives trading. Specifically short positions are extremely useful in the highly volatile crypto markets. Over three-fifths of crypto specializing hedge funds are using these hedging strategies in their portfolio, and this has allowed them to edge out over traditional bitcoin returns. Another surprising finding in the report is that a vast majority of crypto hedge funds have high-net-worth clients and family office investors.
Finsum: Crypto hedging strategies might just be the key to unlocking the full power o digital assets.