As Volatility Falls, Risk Assist Portfolios Continue To Unhedge

As Volatility Falls, Risk Assist Portfolios Continue To Unhedge

The beginning of 2016 was marked by high volatility in the markets, which has since declined in recent weeks. This has enabled Horizon to continue to unhedge many of its Risk Assist portfolios.

Volatility falls

Rising volatility early in the year was driven largely by three developments:

  1. China’s currency devaluation, which sparked fears that other nations would follow suit
  2. Continued falling oil prices
  3. Uncertainty about the Fed’s (and other central banks’) future monetary policy decisions

crudeoilfutures_april2016These concerns helped push a commonly used measure of market volatility, the Chicago Board Options Exchange’s Volatility Index (or VIX), as high as 30.90 in mid-February (after trading in the low teens for much of the past few years*).

Since then, however, the VIX fell to as low as 13.75 in March*—and recently stood at 16.16. Rising investor confidence and stock prices have accompanied that decline in volatility.

What happened, exactly?

Currency markets have stabilized due to signs that central banks around the world are not likely to use currency manipulation (such as devaluation) to achieve their growth goals.

Oil prices have begun to stabilize and even rally (see the chart below), up over 50% from February 11th lows. Rising oil prices have helped calm fears of global deflation that would hurt global economic growth.

The Fed has stated its intention to move slowly and carefully regarding any interest rate increases in 2016. The Fed’s current outlook for just two rate increases this year is in line with most investors’ predictions, which has added greater stability to the markets.

Risk Assist portfolios unhedge

Based on our analysis, we forecast continued lower volatility over the next month. This forecast, in conjunction with rising equity prices, has enabled us to continue to unhedge many of the Risk Assist model portfolios in recent days.

For example, the hedged position in the Horizon ETF Focused with Risk Assist separate account portfolio was recently reduced from 14% to 7%.

Our current belief is that investors in the Risk Assist portfolios will benefit by being more fully invested in the financial markets during what we expect to be a period of relatively low volatility in the coming weeks.

source: Market Watch


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