1 minute read
Little Harbor Advisors
JEFF LANDLE
CHIEF INVESTMENT OFFICER, LITTLE HARBOR ADVISORS
One way to describe equity investments since the brief market meltdown in 2020, and as we look forward to 2022, is as follows: imagine you are at a wonderful party, having a great time and contemplating when you should leave. Too early, and you’ve missed a great deal of fun. Too late, and you run the risk of over imbibing, no Ubers or worse.
Over the last couple of years, equity investments have been akin to that amazing party. There are signs that it is getting later in the evening, but no one really knows for sure when the right moment is to bid adieu and head back home.
So, how does one determine when it is time to leave the party? Probably when it appears everyone else is about to do the same thing, but before the big rush for the exits. For equity markets, VIX instruments are a good proxy for people getting ready to leave. One could think of these indicators as the ‘Ubers’ for investors. Uber rides are priced relative to proximate demand – as more people are looking for rides, the price rises. The same could be said for VIX instruments. Institutional hedgers are like the Uber riders: the more they seek insurance (read VIX options and futures), the higher the price of the protection.
By understanding how that demand operates, it may be possible to divine how investors may react and have insight into when it’s time to arrange for a ride home before the departure rush becomes overwhelming. Given that the uncertainty around the economic and global environments is increasing, tactical exposure strategies driven by information gleaned from VIX pricing are one option to enjoy the party without worrying about overstaying one’s welcome.
Remember, the secret to terminal wealth-maximisation is not necessarily making more on the way up, but losing less on the way down and letting compounding work its magic.
