CIO Magazine Interview

July 2020 — JAG top executives recent interview by CIO Magazine Markets Editor Larry Light for an article on “How to Cope with Today’s Faster Volatility“. Trying to triumph over rampant volatility is too often an exercise in futility. Right now, the standard gauge for stocks’ volatility is twice as high as the historical average. And, as long as the coronavirus and the recession are loose in the land, the vertiginous swings in market pricing are sure to continue. Trying to keep up with these wacky fluctuations is dizzyingly difficult.

Goldman Sachs strategists have warned that volatility—as measured by the CBOE Volatility Index (VIX)—will continue its wild ways for months to come. In February and March, the S&P 500 took 33 days to drop 34%, and then three weeks to recover half of that. Consider troubled Hertz Global Holdings: On Monday, June 8, it rose 115%, on Tuesday it fell 24%, and on Wednesday it dropped another 40%.

It’s not only market routs that bring rapid volatility anymore. The tempo of volatility had been picking up even amid the recently demised bull market. In the 10 years before the 2008-09 financial crisis, the VIX had a mere five days when it swung 5 percentage points or more, by the reckoning of Northern Trust Asset Management (NTAM). Since the crisis, the count is 56 such days, seven in the last year.

Investors, both the pros and the amateurs, have tried any number of strategies to beat the fast-darting will-o’-wisp that constitutes volatility circa 2020. But it’s an open question how worthwhile their efforts are. “Far too much money and time are spent trying to reduce volatility,” said Norm Conley, CEO and CIO at JAG Capital Management. A better idea is “to develop a bit more tolerance to asset price volatility, rather than try to over-engineer things.”

High volatility is a happy hunting ground for hedge funds, and some have done well with it, while others have fallen down in this dangerous, unpredictable landscape. “There is no perfect hedge for volatility, and never will be,” said Dave Mazza, Direxion’s head of product. Performance is muted for less-aggressive strategies, like those that search out low-volatility shares to work as defensive plays.

But finding calm investments has gotten harder. Even utilities, the ultimate steady Eddies, have been hit with crazy gyrations: The S&P 500 utilities index is down 12.5% this year, almost twice as bad as the broader index’s showing. In March and April, utilities (thanks to fears about ebbing power usage amid lockdowns and economic desolation) had bigger moves than the S&P 500 on a majority of days.

Meanwhile, there are structured products, meant to be the antidote to all this mad churning. These synthetic vehicles, particularly structured notes, which can link fixed income with stocks, have had ups and downs lately.

Fueling volatility, apart from the scary COVID-19 pandemic and economic slide, is that the investing world has become increasingly consumed with rapid-fire trading. Hedge funds, of course, are devoted to besting competitors by a nanosecond to place a trade. Among retail investors, tiny or nonexistent trading fees have stoked a frenzy to turn over portfolios. Robinhood, an app popular among young people, is jammed with rat-a-tat-tat trades, and clients pay zero commissions for the privilege.

Another factor feeding volatility is that fixed-income interest rates are minuscule, thus encouraging investors to crowd into stocks. “They’re on a Don Quixote quest to replace missing interest income,” said Mike Kimbarovsky, a JAG managing director.

The stock market used to be a staid venue for most of the 20th century. Then in 1975, the market axed fixed commission trading, where investors had to fork over high fees, often as much as $1,000, to execute a simple trade.

Since then, volatility has been an ever-present presence, poised to erupt at any time. Usually, volatility spikes occur during a market rout, like in 2008 when the VIX leapt to 89 from its customary resting place at around 15. The same things took place recently, although the gauge has retreated to 33 from 86. Still, 33 is darn high.

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