Volatility, Leverage and Returns

Investment banks spend millions upon millions to produce research. J.P. Morgan Securities Ltd. recently produced “Volatility, Leverage and Returns”. Read PDF. An excerpt:

“We find, though, that active managers of bond and hedge funds earn lower alpha when volatility rises unexpectedly. This is because many are structurally long risky assets that get hurt when volatility rises. Alpha returns when volatility stops rising and becomes high only when volatility starts falling again.”

Of course, much of this report is the opposite of a trend following thought process.