Volatility levels set to spike
Lingering geopolitical uncertainty coupled with a 10-year bull run are expected to generate a spike in market volatility over the next 12 months and demand for more defensive investment strategies, according to Triple3 Partners.
Last year saw muted volatility as the US equity markets continued to rally, however now investors question whether the markets would continue their run in 2020 which might be a turning point.
The firm’s chief investment officer, Simon Ho, said: “A 20% rally in US equities was unusual considering the Quantitative Easing (QE) program has been in place since 2008 and markets have been bullish during this time, but US interest rate policy has been buoying the market.
“People have effectively been borrowing money for free, and when that gets taken away, there’ll be some issues. A 10-year bull market by definition has to stop at some point.”
Ho said in anticipation of increased volatility, investors should be looking to protect their portfolios this year and for that a more defensive play would be required, with volatility-based funds likely to deliver strong returns in a sell off.
“Retail investors in particular would do well to put their money into something that’s negatively correlated to equities to ensure they’re protected over the course of 2020,” he said.
“With the strong investment performance that equity investors have enjoyed since 2008, it would now be prudent for them to consider portfolio protection.
“Investors need to know that with every year that goes by, there’s a greater risk there will be some sort of pull back, but if you buy volatility derivatives, for example, you can get a negatively correlated performance relative to any underlying equities.”
AUTHOR
Oksana Patron
Recommended for you
VanEck is expanding its fixed income range with a new ETF this week to complement its existing subordinated debt strategy which has received $1 billion in inflows this year.
Specialist global equities manager Nanuk has celebrated 10 years of its flagship New World Fund and is actively considering its next possible vehicle.
Australian equities manager Datt Capital has built a retail-friendly version of its small-cap strategy for advisers, previously only available for wholesale investors.
The dominance of passive funds is having a knock-on effect on Australia’s M&A environment by creating a less responsive shareholder base, according to law firm Minter Ellison.
