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Coronation Report: Volatility Down on Fed Official's Remarks

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LONDON (–Coronation International Ltd., in a report on its funds of funds results, said that the implied volatility of asset prices declined in September to an eight-year low, and it reported signs that some hedge fund strategies, especially those that require a long position on volatility, are being abandoned by the market.

Coronation attributed the decline to “dovish” comments by an official of the U.S. Federal Reserve to the effect that the Fed feels no urgency about any further increase of interest rates. These remarks helped fixed-income strategies perform well in the third quarter in general and in September in particular.

Nonetheless, the asset management firm expressed some surprise. The drop in volatility is “seemingly at odds with the high level of concern over global growth rates, increasing commodity costs and significantly higher energy prices.”

As to returns, Coronation reported good news. Following negative quarterly returns for hedge funds as an industry in the second quarter, the third quarter of 2004 represented a recovery. Its relative value fund of funds now has a year to date return of +2.66% (U.S. dollar class) and of +3.11% (euro class).

Its global macro fund of funds continues to struggle, though, recording its second consecutive month of drawdown in September. The report suggested that this was because the managers of the underlying funds have not been correctly positioned on the yield curve.

Coronation’s global macro fund of funds, U.S. dollars class, is down 3.21% year to date, although it has earned an annualized return of 7.57% since its inception, November 2000. The euros class is down 2.74% year to date. Since it was launched in December 2003, that is roughly the “since inception” figure as well, and it annualizes to -3.65.

Another London-based fund of funds official, reached Thursday, expressed his agreement with Coronation’s observations about implied volatility. Paul Wales, a manager at RAB Capital plc, said that volatility has become surprisingly low, to a degree that implies a degree of investor complacency.

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Contact Bob Keane with questions or comments at: [email protected].


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