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Alternative Market Briefing

Volatility Indicators Part Two: the chance remains for an upswing to match the previous 24% downturn, indicates need for focus on scaling of positions

Friday, March 27, 2009

From Kirsten Bischoff, Opalesque New York: The close of the month marks the end of the first quarter and possibly another large redemption date for hedge funds. However, there are many investors maintaining 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 returns.

As the equity markets dropped approximately 24% in the first eight weeks of 2009 followed by a rally, which may or may not last, volatile swings are still a distinct possibility whether we are entering a prolonged depression or entering a recovery.

During an investor call in November of 2008 New York-based Penso Capital Markets addressed the idea of “Maximum Pain”. This idea stated that given SP500 Options implied 40% volatility for the year 2009 significant swings were to be expected. Specifically, there was an implied 98% chance that the markets would rise OR fall 20% (a scenario which played out almost immediately in the first quarter). The Penso team warned that both bulls and bears would be at risk during 2009 if they were not nimble and actively manage positions.

“The question here is can the market at some point be up 25% this year? We believe there is significant risk for that,” Steve Gross, Principal at Penso Capital Markets says. The same data that Penso released in November 2008 implied (and continues to imply) there is a 20% ......................

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