Bruno Pannetier of Old Park Capital is concerned about what he sees as significant complacency. Like many volatility traders, Pannetier, whose fund is up over 19 percent this year, sees a volatility filled future, however.
After suffering from the choke hold of the US Federal Reserve’s historic stimulus, an uncommon feature of past market environments might return: volatility.
Fed’s stimulus has lulled investors into a false sense of comfort
As the Fed’s stimulus has lulled investors into a false sense of comfort in how the masters can create comfy environment where loss is seldom experienced, Pannetier is looking for a rude awakening to the power of Mr. Free Market.
“We think that investors should prepare for a surge in equity market volatility,” said the vol trader, a segment of professional investor who survives based in large part how they can manage from one shifting market environment to the next.
Pannetier on market complacency
Pannetier looks at what’s happening today with the wonder a child has at Disney World: how can such an ideal place exist? But the parents, who know the cost of living in a dream world, look at the experience somewhat differently. Something is abnormal.
“This consistently low volatility that we have experienced highlights the complacency that the market feels by completely discounting fundamentally bad news,” Pannetier writes. accompanied with equity highs. “The equity markets are desensitised to bad news,” he writes as he watches a former conquest turn violent in Russia’s brazen involvement in downing a commercial airliner and historic attacks in the Middle East playing themselves out.
“This is not normal,” Pannetier writes.
Old Park Capital benefited from volatility strikes
But sometimes abnormal can be interesting, as Old Park Capital found. In January and February the fund’s returns – over 6 and 5 percent respectively – benefited from volatility strikes as aggression in the Ukraine and Russia escalated.
Volatility trading has been for a long time viewed with disdain in more traditional equity investing circles. The most dogged of the managed futures vol strategy is short volatility, as certain managers such as Miami’s Protec are known to use both a long and short volatility option strategy but this is disguised by their overall fundamental outlook on the energy markets. Protec, operated by former traders for a major oil company, have found opportunity in placing both long and short volatility collars on energy markets.
While short volatility has been dismissed in certain quantitative quarters for its blow-up potential, it is this short volatility play in which the major banks are engaged – and the blow up risk is even more significant.
Volatility traders such as Old Park Capital can be interesting in doses. Complete exposure to a volatility play is never advised, but having a component in the portfolio designed to zig when the market zags – particularly if this occurs during periods of market stress – isn’t a bad idea.