Sweet, sweet volatility

Sweet, sweet volatility

Tuesday, September 09, 2008
Hedge funds that benefit from rising commodity prices are so yesterday. Now, according to a story by Bloomberg News, volatility hedge funds are the new superstars, rising to the top of hedge fund returns for the first time in five years.

The average equity fell 8.4 per cent this year, corporate fixed income funds fell 4 per cent and commodity-based equity funds fell 6.4 per cent[amp]nbsp; – but volatility funds bucked the trend and rose 7.3 per cent.

You can certainly understand why this category of hedge fund has done so well. Bloomberg noted that the S[amp]amp;P 500 fluctuated by more than 1 per cent on 71 trading days so far in 2008, well above the average of 61 trading days and the most volatility since 2003.

Bloomberg also pointed out that volatility has risen in part because analysts' ability to accurately predict U.S. profits fell to its lowest level in 16 years in the second quarter of this year. Earnings for companies in the S+P 500 fell 22 per cent, twice the drop that analysts had predicted. Now, with a U.S. election campaign in full swing, volatility could persist.
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