The Fear of Volatility is greater than Volatility Itself.

The Maestro strategy returned +2.08% in February 2014.

Political uncertainties in emerging markets continue to create anxiety for investors. Despite US equities hitting all-time highs and European equities close to their multi-year highs, they have come with considerable volatility. Old Park Capital, like others, sees volatility in equities & bonds as a theme for 2014.

QE tapering is set to continue as scheduled and investors are still scratching their heads to assess the likely impact of the withdrawal of what has been the biggest liquidity tsunami in history.

If we are set for a year of consistent volatility, then the Maestro strategy provides a particularly relevant option for investors. Not simply for the reason that increased volatility on the Eurostoxx will deliver outsized performance but because the strategy will also offer a unique hedge to equities in developed markets, whilst remaining completely uncorrelated to other CTA style strategies.


VSTOXX has increased from a 7 year low in December 2013 of 13.79% to 24% in early February 2014. The Maestro strategy returned +1.08% in January and +2.08% in February 2014.

Weakness in emerging markets as the QE taper-induced capital outflows unveil structural inefficiencies and exacerbate political divides (Turkey, Argentina, Venezuela, Thailand, Ukraine, South Africa, Brazil) and most importantly, there remains a question mark over China’s ability to maintain a growth rate north of 7% per annum and if this is the case, what will be the cost in terms of leverage to the Chinese economy?

Emerging markets are not a marginal issue as they have been the main engine of global economic growth since 2008 and they now represent 40% of global GDP (from 18% in 1998). Therefore we could see a severe decline in their growth rates, which will have a significant impact on corporate earnings in Europe & US.

Indeed the current situation bears a lot of resemblance to 1997 and the first half of 1998: emerging market currency instability, over-stretched equity valuations (particularly in the technology sector) and decent economic growth expectations in developed markets. This cocktail led to a short (less than 6 months) but very pronounced financial crisis in 1998 (with a drop in equity markets of more than 50%), a purely financial correction with no impact in the real economic world (in 1997/1998 economic growth was 4% per annum in the US and 2.50% per annum in Europe). The financial correction in the second half of 1998 led to a significant increase in volatility reminiscent of the volatility conditions prevailing in the period from 2008 to 2011.

Further volatility will come from the current situations (in emerging markets) worsening, but also from the relatively disappointing recent US macro data which has investors questioning whether this is attributable only to weather conditions or whether the data is reflective of some relative weakness in the US economic armour.

Although there are some signs of improvement in the Euro-zone, it is stilled dogged by subdued economic growth, deflation risk and high unemployment.

The reality is that fear of these uncertainties will create further volatility.  The Eurostoxx volatility level is historically low and so the room for further increase is significant given the context of these uncertainties. A remarkable fact is that despite US equities hitting all-time highs and European equities close to their multi-year highs, the dynamics of volatility of European equities (VSTOXX) has been marked by higher lows since November 2013 and is now around 50% higher from the lows observed in November 2013.

The question that many investors are asking themselves is how they can protect themselves from volatility?

The end result for the Maestro Strategy is the expectation that the strategy will perform extremely well in this kind of environment (with annual return north of 40%, as it produced annually on average in the period from 2008 to 2011), enabling the performance of Maestro to act as a shock absorber to other parts of investors’ portfolios that are likely to suffer in very volatile environments. This is particularly relevant for those invested in trend followers and those looking for a free equity hedge (that will also deliver outsized performance).

The 2.08% performance in February and 3.16% YTD performance is a testimony of Maestro’s ability to generate value in periods of increasing volatility, even when these increases remain moderate. Geopolitical uncertainties (Ukraine, Syria, Iran, North Korea, and China/Japan arguments, just to name a few) can create additional local noise from which Maestro shall benefit.

Furthermore, the context of uncertainties could be a catalyst for a deeper shock on equities and bonds, at a time when QE may have taken traditional asset prices to exhaustion levels. We believe that investors need to diversify their traditional portfolios with uncorrelated liquid alternatives that shall help them withstand a possible volatility shock.

The Maestro strategy is a low volatility free, hedge that has exhibited limited (historical) maximum drawdowns* of 4.37% and will protect investors from equity volatility, while delivering outsized performance.

If you are a CTA investor and the environment does not create a consistent trend for the trend followers to deliver performance, then investors must look to the uncorrelated specialist strategy, such as Maestro, which will provide a strong positive performance to counter a downward equity correction.

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