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When volatility increases across all asset classes, risk management systems require investors to reduce exposures.

 

Asset price volatility is an important measurement many investors use to manage the risk levels of their portfolios.  Some strategies have absolute volatility targets, which means they are targeting the maximum price fluctuation over a certain time period.  Other strategies have relative volatility targets, which means they are trying to keep the price fluctuation of their portfolio in-line with an index or benchmark.  When the volatility of one asset class starts to increase more than others (for instance, equities versus fixed income), investment managers can shift their portfolio exposure by holding more fixed income like assets and fewer equity like risks to bring their volatility back in-line with their targets.   

When volatility increases across all asset classes, investment managers do not have anywhere to turn, and they are forced to bring down their exposure to everything.  This can be done in a variety of ways, but the result, increases in asset sales and downward pressure on prices, has the same market impact. 

In recent weeks, that is exactly what has been observed. There has been volatility spikes across a wide range of asset classes, including, equity, gold, oil, FX, treasuries, and credit.  Not only are the absolute levels above normal, they continue to increase at a rapid pace, which forces investment managers to lower their exposure at an accelerating rate. 

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Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Source: Bloomberg.

Source: Bloomberg.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Source: Bloomberg.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Until these pressures subside, the wild swings in assets prices are likely here to stay.

 

Rank Dawson, CFA
Vice President, Investment Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.