Your portfolio
The problem is that some of
these funds have allowed market
exposure to drift higher to improve
performance during the bull run.
Investors need to look for a low beta
score and high alpha. There is also no
guarantee these funds can add value
– arguably the most famous, the
£7.8bn ASI Global Absolute Return
Strategies fund, is still down from
its 2015 peak, during which time the
market has surged.
Gold is more controversial. Calder
says the yellow metal is “emotional”
and the only value is gold itself.
“It can be useful in a crash
environment, particularly if people
lose confidence in the financial
system,” he explains.
Equally, it doesn’t necessarily
provide a direct hedge against equity
market volatility, but systemic failure.
However, gold has its supporters.
Bill McQuaker, multi-asset portfolio
manager at Fidelity International,
believes it can act as a safe haven in
times of market stress or as ballast
to offset riskier positioning. He also
believes now may be a good time to
buy, given the state and direction of
real rates, the weakening US dollar
and overall risk sentiment.
VIX ETFs are a more complex
option. They will track the CBOE VIX
index, which is generated from the
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“Daily and monthly
fluctuations in capital
values are arguably less
relevant when funds are
inaccessible or unlikely to
be needed for a long time”
implied volatility on index options
for the S&P 500. In theory, this is a
near-perfect hedge for volatility –
when volatility spikes, investors will
see higher returns.
However, it has its limitations. It
only hedges volatility at an index
level, and therefore isn’t always a
great hedge for an actively managed
portfolio. Equally, different markets
show different levels of volatility, so
S&P 500 volatility may not reflect
volatility in the UK, for example, or
emerging markets.
Haemorrhaging money
There is another, bigger,
problem, according to
Calder. “While we
can buy these funds
that consistently take
advantage of volatility, they
tend to bleed performance
until it happens. When
it works, it is great and
the returns can be
quite substantial, but
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otherwise, it’s very expensive and, the
trouble is, investors always need to
buy before the event.”
An accident waiting to happen
Minimum-volatility ETFs have
a better record and have seen
significant inflows in the year to date.
These track “low volatility” indices,
which put a higher weighting on
companies whose shares have
experienced the lowest-volatility.
However, some managers regard
them as an accident waiting to
happen. After a long period where
stable growth companies have
been in favour, the lowest volatility
companies now trade on the highest
valuations. If the market turns, these
companies and minimum-volatility
ETFs could well be in trouble.
The final option is to simply do
nothing. On a long-term view, even
the savage crashes of ’87 and ’08
have barely made a dent in the
performance of the market.
“Daily and monthly fluctuations
in capital values are arguably less
relevant when funds are inaccessible
or unlikely to be needed for a long
time,” says Love. “Investors may
wish to benefit from such periods of
almost ‘enforced inaction’ to benefit
from the higher long-term return
potential that many higher-volatility
assets may offer.”
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