2015-09-03 - By Robert Lindblom

Stock Exchange Volatility and the Hunt for Uncorrelated Returns

The volatility on the stock exchanges in August 2015 served as a reminder of the equity risk in many portfolios. Meanwhile, there are few alternatives for uncorrelated returns, as interest rates are low and many hedge funds face difficulties generating alpha. As an investor, you should always be conscious of how unexpected risks can affect your portfolio.

August 2015 has been a challenge and a reminder for many investors of the large share of equity risk that many carry in their portfolios. Led by a renewed plunge on the Shanghai stock market (SHCOMP), where index fell by 6.3% in one day on August 18, global stock index (MSCI World) fell by 9.5%, in the following days until 26 August. In a little more than a week, many stock markets saw the worst as well as the best days in years, reflecting the macroeconomic uncertainty.

Lujiazui Finance and Trade Zone

Lujiazui Finance and Trade Zone

To make things worse, interest rates globally are at a historic low, making it highly unattractive to carry fixed income. On some markets, such as the Swedish and the Swiss, negative interest rates are a strong incentive for investors to strive for a minimal amount of cash in their portfolios.

The, by now, traditional alternative would be investing in hedge funds. However, in the last few years we have seen that many managers have found it difficult to generate alpha. Looking at the broader global hedge fund index (HFRXGL), it has moved -1.5% YTD (1 September 2015) and -2.3% in August. The low volatility of the asset class is still attractive to many investors, but the discussion about the ability of hedge fund managers to provide alpha will probably continue.

Even if some large investors, such as the California Public Employees’ Retirement System (CALPERS), have eliminated their hedge fund programs due to complexity, cost and scale, the hedge funds’ assets under management has grown, proving that there is a strong demand for uncorrelated assets.

When I founded Entropics together with our Chief Underwriter, Dr. Gunnar Roos, a major deciding factor was to provide investors with an additional source of uncorrelated and good risk adjusted returns.

August has demonstrated what low or non-existent correlation means. While volatility has been very high on the stock markets and many have suffered substantial losses, the Swiss Re Cat Bond Total Return Index has moved +1.27%, reflecting the low correlation of the assets class.

As an investor, you should always be considering how to diversify your portfolio to cope with unexpected financial events.

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Robert Lindblom

Robert Lindblom


Robert has close to 30 years' experience from the insurance- and asset management industry. Prior to starting up Entropics Asset Management AB, Robert worked for 10 years with the European Asset Manager Brummer & Partners, where he started, and become the first CEO of Brummer Life Insurance Company. Prior to that Robert was one of the founders of one of Sweden’s first insurance broker firms where had the position of CEO for 10 years. Robert holds an MBA in Finance from Cass City University, London.

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