Low Volatility Means Low Turnover?
By Roger Nusbaum, AdvisorShares ETF Strategist
ZeroHedge had an interesting article about the very low turnover in hedge funds in the third quarter, only 26%. The title of the article includes the word paralyzed but the text rules out complacency. Instead the conclusion seems to be that the market is going up in a way that just should not be, summed up as follows:
…simply paralyzed, as they no longer have a grasp of financial “logic” when it is all superseded by central bank liquidity injections, and as such most trades feel fake, forced and just part of the FOMO charade to avoid losing one’s job.
The article notes that a range of expectations from “extremely aggressive to bearish” has served to compress volatility. While this was a big point in the article as market participants are clearly trying to understand why the VIX and volatility are so low, extremely divergent opinions always exist and that they are just now “compressing” volatility doesn’t hold water.
Hedge funds are obviously very different from do it yourself investors and advisors who service individual investors, but it is worth exploring for retail sized account. Earlier this year, Eddy Elfenbein from Crossing Wall Street reported the following:
At one point during June, the S&P 500 had a run of 16 days in which the index closed higher or lower by less than 0.3% 13 times. Eight of those times, that change was less than 0.1%.
Anyone even vaguely connected to the CBOE Volatility Index (VIX) knows that it has spent dozens of days this year below ten after having only done so a handful of times in its more than 20-year history. There are countless other stats being cited (look at your various social media feeds) about how long it has been since there has been a decline of X%, how long the bull market has been going compared to previous bull markets and so on. Contrarian implications notwithstanding, the market has gone straight up very slowly.
I’ve disclosed many times that the portfolio I manage for clients is mostly a mix of individual issues and narrower ETFs. If you do anything remotely similar, how have you done this year? How have each of your holdings done? How has the overall equity portion of your portfolio done in relation to the roughly 16% gain for the S&P 500?
Assuming no huge bet, I mean really big, on value stocks this year or not having had the bad luck of being very heavy in the few stocks that have imploded this year, I would venture that the typical, diversified portfolio is up at least low double digits. And if that is correct, it is up that low double digits with very little volatility.
If you concede me the point that a well-diversified portfolio is up at least low double digits versus 16% for the S&P 500 and has gotten there without much volatility, then how much trading would you actually need to do in that context? Someone unlucky enough to not have captured much of the run up may feel pressured to change around and capture more of what they think they are missing, that’s a different story.
This may be part of the equation for hedge funds or not, I don’t know but for individuals, what matters is where they are in relation to where their financial plan says they need to be. Someone who didn’t panic in late 2008 or early 2009 with decent upcapture is likely in a good spot relative to their planning (assumes adequate savings rate).
Despite the environment there are still stories that change, new technologies and opportunities that come along but it is ok if you find yourself not having traded much this year. There will come a point where more trading may need to be done beyond the occasional trade.
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