Managed Volatility: Risk Reduction in a Low Volatility Environment

August 2018

For our global managed volatility strategies, the historically quiet equity market conditions that persisted through early 2018 posed two challenges for our risk reduction objective: 1) Reducing beta had diminished benefit in lowering the equity portfolio’s overall volatility. 2) Currency volatility became a more important driver of the investment’s total risk. 

Although equity volatility has normalized in recent months, a return to a more subdued market environment remains a reasonable possibility. In this brief note, we discuss the impact of a low-volatility equity environment on risk reduction. We address how low equity volatility accentuates the impact of currency translation issues, which are of particular relevance to investors whose base currency denominates only a small fraction of the benchmark. We offer currency hedging-based approaches that aim to restore the expected degree of risk reduction. 

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