R.G. Niederhoffer Capital Management is noting the markets have been so quiet that the 1.18 percent drop in the S&P 500 (INDEXSP:.INX) on July 17th was the first time in 63 consecutive days the market moved more than 1 percent in either direction – the longest such streak in almost 20 years.

Niederhoffer

This unusual lack of volatility has been questioned by a number of quantitative traders as they gear their algorithmic investing approaches to deliver uncorrelated returns.  The problem with such approaches, however, is that performance when the market is sailing to new heights can be less than hoped.

Niederhoffer up 3.2% in the second quarter

Such is the case with Niederhoffer’s flagship diversified program, which has $325 million under management.  While the fund is down marginally year to date, -0.04 percent, it was up 3.2 percent in the second quarter. The goal of the program is to deliver consistent downside protection and deliver strong standalone returns – a tough task in a consistently rising stock market.

Niederhoffer’s best performing program: Optimal Alpha Program

The group’s best performing program has been the Optimal Alpha Program, which is up 6.1 percent through July 29. The nimble fund, with just under $30 million under management, targets zero correlation to equity performance.  Coming off a 25 percent performance last year, Niederhoffer recently changed the formula and is pleased with the results, a recent investor letter noted.

Niederhoffer’s worst performing program: iHedge Inflation Protection Program

The worst performing fund is the iHedge Inflation Protection Program.  As inflation has been out of sight, the fund “has been suffering from its investment mandate to provide short fixed income and long commodities exposure,” the investor letter said. “Since our most successful sector has been the continuously rallying fixed income market, iHedge has been fighting a sharply uphill battle.”  The fund is down 12.5 percent year to date.

Niederhoffer discussed his long volatility tilt and said he has resisted the short volatility temptation to pick up income every month. “It has been a challenge since 2009 to run a strategy exposed to realized volatility,” he wrote. “But one thing we have resisted is the temptation to be more ‘short volatility’ and drift away from our core competency.

Niederhoffer looks at future potential volatility. “I suspect the rest of 2014 will include some fireworks and we are working hard to make sure we are ready for a very different mode in the markets,” he wrote. “…So much money printing by central banks and general interference with market activity is likely to create a set of market movements that are less related to past market behavior than at any time in our careers.”

These are the words many professional traders are uttering.  When it happens is the issue.