Harness Volatility

Volatility Investing

Investors commonly associate market volatility with instability and uncertainty. But volatility can be harnessed to target a return stream uncorrelated with the equity and fixed income markets.

Historically, short volatility strategies have had low correlation to stocks and other alternatives

Many alternative investments actually have a high correlation with stocks

Short volatility strategies have low correlation to stocks and other alternatives

Many alternative investments hold equities and may be correlated with equity markets, but short volatility strategies provide exposure to market volatility. Short volatility strategies have low correlation to the broad equity market and also to other alternatives and may provide diversification to an alternatives allocation and a traditional portfolio.

 

Volatility strategies may increase the risk-adjusted return of an alternative allocation

Allocating 25% of an alternatives portfolio to short volatility strategies may increase return without raising standard deviation.

  100% ALTS 75% ALTS
25% SHORT VOL
Annualized Return 4.5% 5.6%
Standard Deviation 6.2% 6.2%
Sharpe Ratio 0.57 0.75

Standard Deviation: A statistical measure of the historical volatility of an investment. A measure of the extent to which numbers are spread around their average. The greater the standard deviation, the greater the investment’s volatility.

Sharpe Ratio: A statistical measure of risk-adjusted returns. Calculated as (Portfolio Return-Risk Free Rate)/Standard Deviation.