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Volatility ‘and Fear’ Creeping up

January 20, 2009 Leave a comment

Source: Bloomberg

The above chart is everyone’s latest favourite, the VIX index (otherwise known as the Fear Index). Today it closed at 57, up from 50 at the start of the day, and as can be seen it is creeping back up towards those October and November levels. Given the S&P500 closed down today by more than 5%, its no wonder the VIX is up but the big question is…does this mean there is more pain to come?

So what is the VIX index?…its a mathematical calculation of the implied volatility taken from S&P500 option contracts that are sold on the Chicago Board Options Exchange (CBOE). It is an expectation of the S&P500 market volatility of the next 30 days.

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Trends for 2009

January 20, 2009 Leave a comment
  • Demise of the “absolute return” hedge fund…they said they can provide positive returns in any market and in 2008 they didn’t deliver. Marketing hype that will hopefully go away and replaced with full transparency that discloses where their true risks lie. On the positive side, many hedge funds are wonderful investment vehicles that have the potential of providing a portfolio with return potential and diversification by taking on “non-traditional” risks…whether it be credit, emerging market, optionality, commodities, etc.
  • The comeback of simplicity…traditional investments like shares, cash and bonds will be back in vogue for the adviser ahead of structured products and hedge funds. Multi-manager funds also could make a comeback as advisers and/or their clients realise they need to keep investment selection simple. Ditto for index funds as many active managers have once again shown themselves not to be so skilful after all.
  • Increased regulation for financial services… ASIC is taking margin lending under its wing and with the demise of Storm Financial, and numerous diversified financial services companies there is only one way for regulation to go.
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