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Investment Process - Volatility
While Fourth Quadrant Asset Management is well known for its ability to navigate turbulent markets, we have a multitude of competences to capture uncorrelated returns. This menu of capabilities includes utilizing securities tied to volatility. Tactical investments of this type are beneficial to a portfolio as volatility returns are generally unrelated to equity markets and can be designed to gain from markets that go up, down or even sideways.
Volatility investment begins with an analysis of market conditions but is focused more about magnitude and speed of market movement rather than pure direction. Once we have determined our forecast for magnitude and speed, we go through the same process as we did with options but in a more predetermined order:
- Valuations -- Are options and securities tied to volatility trading at a discount, in-line or at a premium? We will look at relative valuations versus history, peer analysis and intra-security metrics
- Term structure – Relative valuation analysis of options and volatility securities in different time frames (e.g. March options versus April options)
- Interest rate outlook – Interest rates impact option pricing (higher interest rates = higher call option values)
- Dividend outlook – Dividends also impact pricing of options (higher dividends = higher put option values)
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Learn why Fourth Quadrant Asset Management may be right for you:
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