A Common Denominator: Volatility
The study highlights several other investor concerns as well – including asset bubbles, rising rates and geopolitical uncertainty. What all these concerns have in common is that they create uncertainty about the future and how markets may respond, i.e., they create the potential for volatility. But volatility is not inherently bad: it can all depend on what is driving it and how investment professionals plan to manage it.
While volatility caused by geopolitical instability can negatively affect investor portfolios over long periods, volatility can also be a vital sign of healthy markets. For example, differing investor views on stock valuations or the direction of interest rates can cause a positive type of volatility: price moves that demonstrate that markets are functioning efficiently. In fact, volatility is a natural feature of markets.
This is why we believe it’s not enough to prepare a portfolio by including “safe” assets that can cushion a portfolio if the market dips, but also to allocate to strategies that can actively benefit from higher market volatility. The Natixis study shows that institutions are thinking about volatility in just this way.
In particular, many institutions we talk with are seeking strategies that can benefit in a higher volatility environment — in other words, assets that can move in the opposite direction from traditional assets such as stocks, especially in times of crisis or heightened volatility. For example, some trend-following managed futures strategies can have a low average correlation with stocks and have the potential to outperform when stock markets underperform.
Institutional investors seem to understand that, while volatility may rise, it doesn’t have to spell disaster for their portfolios. They appear to recognize the importance of being prepared for volatility’s return by including alternative strategies that can potentially offset risk or generate additional return in higher volatility regimes.
Understanding investors' sentiment is central to cutting through the noise of today’s markets. Access our most recent Research on the attitudes and behavior of investors worldwide.
Volatility management techniques may result in periods of loss and underperformance, may limit the Fund's ability to participate in rising markets and may increase transaction costs.
Managed futures use derivatives, primarily futures and forward contracts, which generally have implied leverage (a small amount of money used to make an investment of greater economic value). Because of this characteristic, managed futures strategies may magnify any gains or losses experienced by the markets they are exposed to. Managed futures are highly speculative and are not suitable for all investors.
Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing.
All investing involves risk, including the risk of loss. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Diversification does not guarantee a profit or protect against a loss.
Natixis Investment Managers, Global Survey of Institutional Investors conducted by CoreData Research in September and October 2017. Survey included 500 institutional investors in 30 countries.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.