From the November 01, 2008 issue of Futures Magazine • Subscribe!

Volatility explodes

Volitilty exploded across the boardin October, but particularly in equities after the passage of the Troubled Asset Relief Program or TARP.

Tom Sowanick, chief investment officer for fund of fund Clearbrook Research, gave his take on the current market turmoil at an Oct. 6 panel on alternative investments. Sowanick said demand for alternatives will not go down but expects the use of leverage will go down.

“The prime brokers that are left will not be able to take on more leverage because they are commercial banks, not investment banks. The lower use of leverage by banks will also curtail the use of leverage by hedge funds,” Sowanick says.

He sees a movement towards more transparent strategies and real assets. “What are people going to invest in? You can’t invest in banks because they are too murky, you can’t buy Treasuries because the they offer no yield, you can’t buy stock because there are no earnings. So I might as well own gold,” he says.

He added that a sense of doom may blind some managers from opportunities when they do come. “We will not know a good time when it comes.”

The day he spoke, the Chicago Board Options Exchange’s volatility index (VIX), also known as the fear gauge, hit an all-time high. He pointed out that the VIX hit 43.24 when hedge fund Long-Term Capital Management blew up (see “Volatility!”). “It is fitting that we would hit new highs on the VIX today,” he said, but warned, “There is a natural tendency to try and get safe at the absolute worst times.”

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