Low Volatility Funds

Low Volatility Funds

Low volatility funds are increasingly in demand from investors seeking a predictable return profile.

Ten years ago many fund managers were bemoaning the lack of volatility in the market. Hedge funds claimed to thrive on volatility.

During the financial crisis, many firms experienced difficulties coping with the high levels of volatility they were presented with. Since then there has been an increased demand for low volatility funds and investment funds that pursue strategies that can provide consistent returns coupled with low volatility.

A low volatility fund can invest in a range of assets in an effort to provide both low volatility and some level of return to investors that will aim to be superior to cash or Treasuries. Trading in public markets or derivatives that are based on prices in the public markets, including commodity prices, low volatility can be hard for a fund to achieve. Other non-correlated strategies are now emerging that can combine diversifying factors with a lower volatility profile.

Loan funds are investment strategies that loan investor capital to businesses or to finance projects. As the asset is a loan, its return characteristics are fairly predictable. The main risk is that the loan might not be repaid. A diversified series of loans made on a secured basis could fit the profile for a low volatility fund.

The ongoing demand for low volatility funds is not likely to ease up anytime soon. Other unpredictable factors like market shocks or ongoing declines in commodity prices and, eventually, higher interest rates will all play a role in fuelling demand for low volatility funds.

Pension funds and sovereign wealth funds face predictable demands on their capital and low volatility funds help them to meet those demands in a consistent fashion. The best low volatility funds are those which can demonstrate a strategy with return characteristics driven by the underlying assets, that are unlikely to vary regardless of the direction of equity markets or commodity prices. Even real estate can sometimes be subject to sudden swings: the quest for non-correlated, low volatility funds therefore requires that both investors and asset managers consider assets and investment approaches that come from less traditional directions.

Loan funds can fit into a low volatility fund profile if they are properly and responsibly managed with a diversified portfolio and proper oversight of the credit risks involved. Loan funds are likely to play an increasingly important role in the ongoing financing of developed market businesses and infrastructure as banks retreat from commercial finance, creating more opportunities for investors looking for low volatility funds.