“The next two weeks could cause a lot of pain in many portfolios,” said Mark Yusko, CEO and chief investment officer at Morgan Creek Capital Management, LLC, in New York.
One of the few things pros like Yusko agree on when it comes to the partial U.S. government shutdown that began this week and the possible failure to raise the government’s legal borrowing limit by October 17 is that market turbulence is likely to rise.
U.S. stocks retreated for a second straight day on Thursday as the shutdown dragged on and the dollar weakened broadly. While the selling has been orderly so far, investors see anxiety rising if the weekend arrives without any sign of a political deal.
One way to take advantage of that, portfolio managers say, is to simply bet on more volatile trading rather than try to navigate the ups and downs.
The CBOE Volatility Index, the world’s best-known fear gauge, hovered around 17 on Thursday, roughly a two-month high but still a far cry from 48, where it peaked in 2011, the last time Congress threatened not to raise the debt ceiling.
“Even a legitimate threat of a default will send volatility exploding – even to the 30s,” Yusko said. “You can make a lot of money in a short period of time.”
Yusko said investors can get exposure via the unleveraged iPath S&P 500 VIX, also known as the VXX, or the leveraged VelocityShares 2x VIX, or the TVIX.
For those who think it could approach 2011 levels again, snapping up a buy option now looks like a bargain and could be a nice way to hedge against losses elsewhere.
Douglas Peebles, chief investment officer for fixed income at Alliance Bernstein, added: “Don’t short volatility. Because all roads lead to it. There is going to be less liquidity and more question marks about gridlock and growth. That’s painful to sit through, but it’s fertile ground” for increasing returns.
