Christophe Reech of Reech AiM Partners discusses some of the options, opportunities and risks for investors in volatile and uncertain markets.
Date: Dec 2011
Tags: Managed futures, Volatility, Portfolio construction, Asset allocation, Risk management
With market moves of 4% to 5% being more normal, it’s very hard for investors to take directional views when investing.
At the same time, said Reech, the opportunities are to go in the direction of those products and strategies which are designed to capture volatility – which means managed futures, global macros and anything which is systematic and known as “long gamma”.
Another opportunity, added Reech, relates to market neutrality, so investors can absorb the volatility of a market and neutralise it in the fund. Consequently, he said, they can be exposed to risk in the market without necessarily taking the direction of the market.
Adapting portfolios
Reech said he is a strong believer in portfolio construction and dynamic allocations as a key component of asset management today.
As a result, investors with portfolios which were purely directional have probably suffered because they wouldn’t have been able to move fast enough to another type of construction.
So it is the time when managed futures were not performing – because the market wasn’t volatile – which was when Reech said investors should have started constructing a portfolio to add in CTAs. It is a free insurance contract, he explained, to perform when needed.
The lesson to learn from recent volatility, therefore, he added, is that portfolio constructions should have been balanced with the alternative investment world – ensuring a good mix between directional market neutrality and long volatility funds.
Key risks to be aware of
The risks with volatile market environments include liquidity, explained Reech, given that if investors get caught, it can cost them a lot of money.
Another risk to avoid, he added, is being tempted by taking more risk than necessary when investors have no idea where the market is going.
For example, if investors are in directional or neutral markets, they should try to take a risk which is very reasonable in terms of market exposure. On the other hand, if they are in managed futures, for example, they want managers who are capable of ramping up the risk to the maximum at the moment when volatility is at its maximum.
How to view risk
Given that risk is about making money, Reech said that if investors don’t take risk, then they won’t make money – so consequently they have to know what has a chance of making money in volatile environments, and then taking that risk at the right moment to do so.
If investors don’t take risks on strategies which make money when the broader environment is risky, then Reech said they won’t ever make money.
