As 2022 comes to a close, volatility could still be a thorn in the side of capital markets in 2023. Per a Business Insider article, Morgan Stanley is forecasting “extreme volatility” in the new year.
The CBOE Volatility Index, or simply the VIX, has reached over 100% this year, particularly in the early goings of 2022. While it has waned recently, it doesn’t mean investors are in the clear.
The rising tide of consumer prices has market experts looking back at yesteryear when inflation was also causing fits for investors. This includes the 1940s and 1970s in particular.
“We don’t think it’s the 70s, we think it’s more of the 40s, where it’s a boom-bust,” Morgan Stanley chief investment officer Mike Wilson told CNBC. Stanley compared the current inflation cycle to the demand-driven inflation that took root in the economy after World War II.
As the Business Insider article explained, “the 40s, supply and demand eventually balanced out – but inflation remained sticky, which could be a clue to what lies ahead for the economy next year, Wilson said.”
If this projection holds, it appears that inflation won’t be waning, at least not anytime soon. Therefore, investors may want to continue adding inflation and volatility hedges.
“Already, that trend is starting to show, and despite softening demand and improving supply issues, inflation is still well above the Fed’s 2% target, with prices barely cooling to 7.7% in October.”
“Inflation can’t ebb as quickly as it flows when demand falls by the wayside and supply picks up. And that’s exactly what we see in 2023,” Wilson said.
Smooth Out Volatility With DBMF
While investors can employ a number of hedging opportunities, there’s an easier way to extract gains. The iMGP DBi Managed Futures Strategy ETF (DBMF) essentially has a built-in hedging component by using an active management strategy — this allows for dynamic changes to the portfolio when market conditions warrant a change.
DBMF invests in a variety of assets, allowing for the diversification of portfolios with non-correlation to traditional equities or bonds. It utilizes long and short positions within the futures market on several asset classes: domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).
At the heart of DBMF’s strategy is the Dynamic Beta Engine. This proprietary, quantitative model attempts to determine how the largest commodity-trading advisor (CTA) hedge funds have their allocations.
The engine analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged performance (not the positions). DBMF takes long positions in derivatives with exposures to asset classes, sectors, or markets that are anticipated to grow in value and takes short positions in derivatives with exposures expected to fall in value.
For more news, information, and strategy, visit the Managed Futures Channel.