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Alternative Market Briefing

Volatility Indicators Part One - the worst performance for hedge funds may be past

Thursday, March 26, 2009

From Kirsten Bischoff, Opalesque New York:

The close of March marks the end of the first quarter and possibly another large redemption date for hedge funds. However, there are many investors maintaining their allocations in the industry, and they have given managers a clear indication of their mandate: preserve capital through the crisis and focus on risk adjusted return capital. For these investors there is the distinct possibility that with volatility normalizing in the markets it is possible that in this financial crisis, the worst performance for hedge funds is behind us.

The Chicago Board Options Exchange’s VIX measures the implied volatility of options based on the broad US equity market benchmark. While the VIX currently remains high (hovering around 40pts), even with large drops in the equity markets volatility, it has not returned to the levels it was at in October and November (when it spiked to 80+pts).

This fall the spike in the VIX occurred during the first 40% drop in equities, but the subsequent drops did not spark renewed panic in volatility. The markets had already begun to understand the change in the paradigm and were re-priced for a higher systemic level of volatility, preparing them for the bigger drops, which occurred after October and November.

“I do not believe we can spike up to the highs we saw in October and November because the surprise is no longer there for......................

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