Blue Ink Investments warns investors of high market volatility levels

The first four months of 2011 have been characterised by significant levels of market volatility, fuelled by the European debt crisis, natural disasters and political unrest. During this period, the All Share Index (ALSI) returned 3.38%, with volatility levels of 7.72%.

This volatility once again highlights the need for proper diversification across asset classes, within investment portfolios.

Eben Karsten, Portfolio Manager at Blue Ink Investments, says because the current economic outlook is not translating into growth, investors are not sure when the markets will turn. “We currently feel that the global economy is to an extent, unstable, and investors need to be weary of market volatility. This reinstates the need for investors to maintain exposure to strategies such as hedge funds and other asset classes that offer a degree of protection in times of market turbulence.”

While the monthly Blue Ink All South African Hedge Fund Composite (BIC) returned 2.83% for the first four months of 2011, just over half a percentage less than the ALSI, it did so with 1.85% volatility, significantly less than the ALSI.

The BIC has achieved a total return of 30.84% over three years, compared with 16.35% from the ALSI over the same period. Over the last twelve months, the BIC has returned 9.12% versus 17.80% on the ALSI. However, the one-year volatility of the BIC is just 1.99% compared to the 15.95% of the ALSI. These high levels of volatility means that equity investors who enter and exit the market at the wrong time can suffer extensive capital losses.

Karsten says that on average, Long Short Aggressive and Long Short Conservative hedge funds have outperformed the ALSI since the beginning of 2011, returning 4.01% and 3.90% respectively.

“It is difficult to know when a bull market will turn bearish, which is why it is so important to always maintain exposure to strategies that offer investors a certain degree of protection in periods of market uncertainly. Investors would bode well remain to conservatively invested,” concludes Karsten.