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Consumer and investor sentiment has come roaring back in 2021, but this may be a more volatile recovery than many expect. US equities have rallied with widespread adoption of the vaccine and the re-opening of the economy. But one hedge fund manager warns that investors may be surprised by continued volatility despite all of the positive news.

"Believe it or not, the volatility now is almost as high as it was during the 1987 stock market crash," says Paul Lucek, CEO and co-CIO at Ridgedale Advisors."People just don't see it because it is in markets other than equities."

According to Lucek, commodities, currencies and fixed income are all exhibiting high levels of volatility despite the persistent rally in US equities. Uneven vaccination distribution globally is also impacting emerging market stocks. This means that the recovery is still vulnerable to bad news and the market environment is ripe for dislocations.

"There's still a lot of weakness out there," adds Peter Gorman, a partner at Ridgedale Advisors. "If you look at recent supply chain disruptions along with price increases in housing and commodities right now - it could slow the recovery if people can't get what they need. Investors are hoping to see everything come back right away, but we think it's going to be a longer recovery period than people expect."

Gorman points to commodities as one area where it could be a few years before markets are totally out of the woods. Energy and metals have come back fast, but agriculture will require new planting to build back supplies. In fixed income, lower rates could push investors into more opportunistic credit in search of yield. Any significant dip in the equities rally could exacerbate these weak points.

For Ridgedale, these vulnerabilities are opportunities. Ridgedale's systematic strategies are on the lookout for divergent trends with the goal of taking advantage of mispricings as they arise. "The volatility in the market right now is a positive for us," Gorman says. "When asset classes start to trend away from each other we can take advantage of those breaks."

Ridgedale's absolute return strategies have been on a tear since the start of pandemic-related volatility. The firm's flagship MSP Partner Series, a systematic global macro absolute return fund launched in 1986, was up 17.26% in 2020 and has built on that momentum in 2021. The strategy is up 28.02% through the end of the first quarter, according to performance information for investors reviewed by Opalesque. Both Lucek and Gorman expect that the environment will remain positive for the strategy throughout the rest of the year.

"We're seeing the market normalize higher volatility," Lucek says. "If we eventually start to see higher inflation come alongside that, there will be greater potential for dislocations. In a scenario where equities continue to perform well and investors are forced to be more tactical in other asset classes, a strategy like ours works well because we can take advantage of both of those trends."