A Powerful Tool to Manage Market Volatility

By Salvatore Bruno via Iris.xyz

Merger arbitrage strategies

In times of market stress, investors often consider rash decisions of moving between risk-on equity exposures to risk-off vehicles, often when it is already too late. October has been a difficult time in the market, with the S&P 500 experiencing a six-day losing streak, its longest in two years, trading near its July 2018 level. Coming off one of the least volatile years in history, this type of market movement can be disturbing, but should be viewed in the longer-term context.

Breaking down some of the events that led up to the recent pullback, Federal Reserve messaging removed the word “accommodative” from its most recent post-meeting statement, and several Fed officials have suggested an intent to continue gradually raising rates. Higher rates generally increase the cost of capital for companies and lead to a higher discount rate for future earnings, making them less valuable now. The continuation of tariff talks may explain why Technology was hit harder than other sectors, over fears that their costs from overseas manufacturers could increase. Increases in Energy inventories leading the price of oil lower could have explained some of the energy sector losses.

When market sell-offs occur, investors immediately focus on the volatility of their portfolios as a targeted area for improvement and with the proliferation of Smart Beta strategies, investors have several solutions to address their concerns. However, while managing volatility is an important objective, investors must also consider correlation within their portfolio construction. Herein lies the benefits of Liquid Alternatives: daily access to strategies that are less correlated to traditional asset classes, potentially providing a differentiated source of return.(1)

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