The Market's Big Bet on Low Volatility

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, it's that time of year again. We're getting close to the end of 2018, and that means everyone is starting to talk about what 2019 might have in store for markets.

Joe Weisenthal (0:29)

Truly the most wonderful time of year, I think, is the season right about now. It always warms my heart, and that's when you start getting analyst notes from sell-side shops talking about what their 2019 forecasts are for all asset classes, stocks and bonds and currencies. I truly think it's really like the most heartwarming time of year for that reason.

Don't you?

Tracy Alloway (0:56)

Absolutely the most wonderful time of the year, indeed. But there's a little bit of a difference this year, I feel, and probably it's because December is coming off the back of November and October, which as we've discussed on the All Thoughts podcast before, have been pretty painful months for a lot of investors.

Joe Weisenthal (1:17)

Yeah, that's true. And of course, people always update their forecasts, basically, to some extent, extrapolating on what happened in the recent past.

So I think the fact that we got this sort of October, November, intense bout of volatility has caused people to say, oh, suddenly we see all these new risks on the horizon. Whereas if you had asked them at the end of September, they would have been much more sanguine about what the future had in store.

Tracy Alloway (1:44)

Yeah, everyone's sort of rushing to retool their risk forecasts for next year. But there's one person who has been consistent in forecasting a very similar set of risks for many years now. And that person is going to be our guest on the show today.

Joe Weisenthal (2:02)

That's great. I'm looking forward to this because, A, it'll be nice to get an alternative viewpoint from the always sort of somewhat rosy outlook of the mainstream investing class.

But it's also interesting to talk to people who are contrarians because while it's true that it can pay to have a different view, in the meantime, when markets aren't blowing up, it can be a costly view. So how you reconcile that is always very interesting.

Tracy Alloway (2:30)

Yeah, absolutely, and I have to say I've been a fan of this particular person's work for a very, very long time. So I'm quite happy that we're going to have them on the show and that we'll get to put these questions to him. So without further ado, our guest for this episode is Chris Cole over at Artemis Capital Management. Chris is the founder and CIO of Artemis Capital, and he's been writing about the markets and specifically volatility for many, many years now. Chris, welcome to the show.

Chris Cole (3:01)

Thank you. It's a pleasure to be here.

Tracy Alloway (3:03)

So Chris, maybe just to get started, you could give us a little bit about your background and how you got to Artemis and what exactly it does because it's a little bit unusual, I feel.

Chris Cole (3:15)

Sure. Well, I think the mission of Artemis is to really create opportunity out of chaos.

Normally when there's volatility in the marketplace, that's a bad thing, big equity drawdowns, it impacts people's portfolio in a negative way. Our job is to turn that volatility into something that's positive.

And the history of the firm actually comes out of an old school hedge fund story. I was trading my own proprietary capital throughout the period of 2007 to 2010 and really turned 2008 into something that was quite profitable and tried to develop strategies that paid off in the event that there was a tremendous amount of volatility, but that didn't bleed uncontrollably or lose a tremendous amount of capital if the market continued to do well. And that was how Artemis was founded. It was founded out of a bedroom. And today we have institutional clients all over the world.

Joe Weisenthal (4:13)

So is the goal of Artemis to be, or even the goal of their sort of framework, to be profitable over the long term, or is it as some other funds are positioned to essentially allow people to take more risks during the good times while ensuring that when the bad times hit unexpectedly, that they don't suffer a massive negative shock, basically?

Chris Cole (4:42)

The answer is both, actually. It depends how you want to use the, you know, we're a hammer, you can use this whatever way you'd like to.

I think we have clients that look at it in both ways. But the goal at the end of the day is that throughout the business cycle, we want to deliver returns that show excess alpha, that are on par with what you'd expect from an alpha-generating hedge fund. But the difference is that we want to create most of our returns when the overall market is suffering the most, when there's the most volatility. So instead of where most of the classic hedge fund structure, the classic portfolio has these long periods when there's a bull market and people are doing really, really well.