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The Golden Years are over - how to deal with volatility and crowdedness: Opalesque Roundtable

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Asset allocators have had some golden years behind them. Fixed income and equities had negative correlations to each other, so blending them together gave low volatility in client portfolios. Both asset classes had great returns in 2013 and 2014. Now correlations are moving up. The first hint of that was in May-June 2013, with the Fed tapering, and again last April when yields started to rise in Europe.

When looking back at the years 2008 and 2011, years when markets were down by more than average, those were years alternative funds had to demonstrate their value added. Looking at 2015, this could be another one of those years. Everything started quite well, but most indices have now given up their yearly gain and gone into negative territory.

The Volatility Dilemma

Summer 2015 can potentially be seen as the first hiccup caused by rising rates. Clearers and exchanges like volatile markets as this brings more transaction opportunities for traders and investors, and volumes can double. But if volatility becomes too high, like in August, it becomes challenging for almost all investors and managers. Going into a month like that being completely long volatility is also difficult and very costly. Still, for a volatility fund like Mint Tower, August 2015 was a “textbook” month and the fund made money. But in general, most alternative managers should be able to outperform in years like this...

How to recognize a crowded trade

...Provided they don't get stuck with the crowd. The risk for crowdedness in markets has gone up a lot. Some of the trades that look obvious for people to take positions in become very quickly crowded, and crowded positions are actually the worst to be in, in highly volatile times, because they get unwound the fastest. So typically in areas where most of the market focuses on at such a point of time, you can also suffer the biggest pullbacks. This can be a very dangerous dynamic: things that are in the news attract so much attention, and so much positioning and very quick trading, and this can make the market more treacherous. Read on to learn how Gerlof de Vrij from Blenheim Capital tries to identify a crowded trade.

Can risk management make markets riskier?

Everything with a high yield, high carry, high roll-down, and low volatility, can turn out to be a minefield for investors, despite the “low” risk. The Swiss Franc and then the Chinese yuan were examples where people assume they can count on a presumed base or risk level, but then that suddenly breaks. And because those people had scaled their positions on short-term, historic volatility measures, they often get completely burned. Read on to learn what successful managers do instead.

The Opalesque 2015 Netherlands Roundtable was sponsored by ABN AMRO Clearing and Eurex, and took place September in Amsterdam with:

  1. Gerlof de Vrij, CEO/CIO, Blenheim Capital Management BV
  2. Jelte de Boer, Portfolio Manager, Optimix
  3. Willem de Vlugt, Partner, EValuation Capital Management
  4. Wilrik Sinia, Partner, Mint Tower Capital Management
  5. Gildas LeTreut, Head of Prime Services, ABN AMRO Clearing
  6. Cornelius Müller, Institutional Sales, Eurex / Deutsche Börse
The group also discussed:
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