Duke Buchan III’s $1 billion hedge fund beat U.S. stocks by 46 percent in the decade through March, a period that included the steepest equity-market losses since the 1930s.
Then came the selloff in August when global stocks suffered their worst nine-day drop since the 2008 financial crisis. For four days, The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points, the longest streak ever, and itsintraday swings have averaged twice the level seen during the first seven months of the year. Last week, Buchan told clients he is shutting his firm Hunter Global Investors LP.
“Markets seem to be driven more by the latest news out of Europe than by a company’s earnings prospects,” Buchan, 48, said in a Dec. 8 investor letter. “We have not weathered the ensuing volatility well.”
Traders who used to profit from price swings are struggling as record stock market volatility shows no signs of abating. Hedge funds are on track to post their second-worst year on record, with managers such as John Paulson seeing bets undermined by Europe’s two-year sovereign-debt crisis and concerns over the U.S. economic recovery. U.S. mutual funds are headed for their second-weakest year of deposits in two decades, and the top Wall Street banks posted their worst quarter in trading and investment banking since the depths of the 2008 financial crisis.
Jeffrey Kronthal, a former Merrill Lynch & Co. senior fixed-income executive, said he’s never seen so much volatility over such a long period as this in his 33-year trading career.
‘Friend of Wall Street’
“Volatility, to a certain extent, was a friend of Wall Street, but not like this,” said Kronthal, who co-runs the $1.2 billion hedge fund KLS Diversified Asset Management in New York. “I haven’t seen volatility like this in a sustained way ever before.”
Traders used to profit from volatility in the aftermath of events such as the 2008 bankruptcy of investment bank Lehman Brothers Holdings Inc. (LEHMQ) or the 1998 collapse of U.S. hedge fund Long-Term Capital Management LP, when markets established or returned to medium- to long-term trends, according to Cedric Kohler, head of advisory at Fundana SA, a Geneva-based firm that advises clients on hedge-fund investing.
Historic Volatility (VIX)
That hasn’t been the case in the second half of this year, as swings in the Chicago Board Options Exchange Volatility Index rose to a record. Three-month historic volatility for the gauge known as the VIX increased to a record 191.59 on Oct. 31, above the 92.56 median over the past decade and surpassing the prior peak of 190.44 from December 2008. The benchmark for U.S. options prices and expected stock-market swings surged the most in four years on Aug. 8 after Standard & Poor’s stripped the U.S. of its top credit rating for the first time.