11 May 2010
A massive opportunity in.....Kurtosis
Two weeks ago during his trip to Bangkok, MBMG's affiliated portfolio manager Scott Campbell made a small allocation to an ETN (exchange traded note) on the VIX (The S&P Volatility Index) tracking stockmarket volatility. At this time market volatility was down towards historic lows and to Scott seemed like it could only go one way and boy has it! The Greek crisis, NYSE 10 minute collapse and the bouncy start to this week has seen implied and actual volatility double, yielding a very nice quick profit for the master.
This echoed recent comments by Pure Capital's Anthony Limbrick - "we think there is a massive opportunity right now in the things we trade, namely kurtosis, serial correlation and volatility. It may require moving one’s point of perception in order to see this. We had one of the largest rallies in implied volatility and volatility into October 2008. We also saw one of the biggest moves in terms of kurtosis into October 2008, while serial correlation made a high in the equity markets in March 2009. All of these things peaked almost around the same time, and from that point it has been essentially a crash in those measures. We are focused on this as we trade in this sector, but this is probably not something that a lot of people think about. We have had the biggest monthly fall in implied volatility in history, one of the biggest falls in kurtosis in history, and serial correlation is now at the bottom end of historical ranges."
In plain English this means that in October 2008 assets prices moved more during each minute of each day than they ever had done before; assets, funds and businesses failed at a rate like they never had before and less than 6 months later directional trends reached an all time high. These conditions were very supportive for managers and funds like Man AHL Diversified.Since then these measures have crashed with volatility falling to the low levels that enticed Scott back into the markets, virtually nothing failing and clear trends disappearing. This has clearly been bad for these types of funds -
"a very well-known CTA fund run by one of the world’s largest asset managers based in London, is a good example of a fund that has not done very well over the last year. If you look at how they invest, you would probably find that they also trade a lot of these quantitative measures I mentioned before as well. As I said this fund has been subject to one of the nastiest environments in history for their strategy. The quant measures I have been talking about, they are now near the bottom end of historical ranges. Therefore, we strongly believe that one of the biggest opportunities of the next year to two years is to be long serial correlation, long volatility to a lesser extent, as that is not quite as cheap, also long kurtosis as well."
This message is clear to us and alongside Scott buying vol could indicate that Man AHL is about to yield rich pickings while equity, property and commodity markets face the risk of implosion, providing the volatility and kurtosis -
"How would this crash correct itself? Well, In terms of the measures I had mentioned, global equities look cheap, that is in terms of volatility, kurtosis and serial correlation, but also gold and US treasuries look very cheap. That in fact means that there could be very, very large moves coming in those markets. We don't know the direction, but we do have a strong belief in these markets starting some time over the next couple of months. We believe that is a significant opportunity.indication there could be big moves to come in these markets starting some time over the next couple of months. We believe that is a significant opportunity."
So a strong move in these markets is expected but in equities, commodities and property this is more likely to be to the downside. While there are always pockets of value, the Dow Jones in general needs to fall not juts below 10,000 but actually below 6,000 before it's a clear sign to return to traditional long only equity exposure. We see this taking place in reasonably short order considering the scale of the move. Against such a backdrop a very significant double (or possibly low triple) digit rise in Man AHL might be expected.
Long vol, kurtosis and trends; short equities, commodities and property - this could be the standout trade of the next few years, putting even Scott's stunningly successful VIX trade in the shade....