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Hedge funds and volatility: The ins and outs of ups and downs

Hedge funds returns are rising; does this mean volatility is back?

Hedge funds have enjoyed a strong start to the year, having produced, on average, positive returns in the first two months [see Market round-up, this issue]. Some managers attribute the results to a long-awaited return in market volatility but views are mixed on whether or not it really has come back.

Peter Borish, CEO of Twinfields Capital Management, a global macro, rapid-trading shop focusing on treasuries and currencies, is positive that market volatility has returned and will be sustained. “Over the last couple of years,” he says, “seemingly uncorrelated markets became correlated, such as the dollar and gold. That has corrected now and has resulted in an increase in volatility. The pick-up in Japan and the bottoming out of the fixed-income market have had a similar effect. There is a lot of uncertainty at the moment, creating volatile markets, and the knock-on effects of past monetary policy are beginning to filter through. Higher energy prices, higher mortgage rates, a slowdown in economic activity and the continuing story in Iraq are creating uncertainty and a depletion of cheap money.”

James Skeggs, head of statistical reporting at Fimat’s Alternative Investment Solutions in London, also believes that market volatility could begin to pick up.

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