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Alternative Market Briefing

Volatility deeply influence the hedge fund universe and the trendiness of opportunities: Lyxor

Tuesday, October 08, 2019

Laxman Pai, Opalesque Asia:

Volatility regimes are decisive for most investment approaches, particularly hedge funds. For both top-down players (CTAs, Global Macro, FI Sovereign Arb.) and bottom-up strategies (L/S Equity, Event-Driven, Credit Arb.), volatility deeply influences their universe and the trendiness of opportunities. These volatility regimes are determined by a wide set of drivers, which influence one another, said Lyxor in its weekly brief. It takes a coalition of drivers to alter volatility regimes, requiring a 360° analysis to anticipate volatility trends.

Upstream, macro volatility is paced by inflections of the business cycle, dispersion across world economies, swings in monetary policies and credit conditions, as well as by other tail and geopolitical factors.

Macro volatility reverberates at a micro level

Macro volatility reverberates at a micro level, affecting households and corporate fundamentals. In turn, both households and companies accumulate actual and/or perceived risks and imbalances (through leverage, shifting income/profits, etc.), which finally spread to market volatility.

Turning flows are primary movers for market volatility, triggered by changing macro and micro risks as well as by changing market patterns (trading leverage, imbalanced positioning, stretched valuations, etc.).

However, as volatility became a key input for risk-taking (setting leverage and asset allocation targets) and an asset class on its o......................

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