Dubai: Amid depressed volatility, investors should strategise, making use of the upcoming headwinds like elections in Europe or Federal Reserve policy meetings, among others, rather than falling back on the normal strategy of buying low and selling high, a senior official at UBS said.
UBS uses short-term trading strategies to deliver alpha to investors, and has been outperforming the benchmark indices.
“If we keep chasing the strategy of buying lows and selling high, you may come out of the year with negative returns. We need to use strategies that take advantage of the world you live in,” Vinay Pande, Managing Director-Global Head of Trading Strategies at UBS AG, told Gulf News on his field visit to Dubai.
But Pande said despite a good year on the S&P 500 index, which gained 21 per cent in the past one year, his clients were not happy.
“It was because we had four pretty nasty 3-5 per cent drawdowns. Many who had enough cash, went more in cash,” he added.
And there are many factors on the list of upcoming headwinds. Among them are the upcoming elections in Europe, which has a potential to dent the existence of the Eurozone, and the US Federal Reserve meetings, which may pose danger to markets if they start raising rates too much and too fast.
“If you leave your money at zero or negative rates, you are leaving termites to eat your house. There are two ways to address this. One is easier said than done, by becoming the market timer of buying low and selling high, the other approach, which I found very appropriate with very good risk return, is to engage in short-term relative value trades,” said Pande.
Strategies:
The job for short-term trades has become much more difficult as the volatility has been depressed and co-relations have broken down.
“Volatility is depressed in equities and forex. The first reason is that equity markets are rallying, and the second reason is co-relation across equities has been falling. The fiscal policy is much less in one-size-fits-all approach, than monetary policy, it creates winners and losers, so the co-relation will drop,” said Pande.
So, amid the excessive optimism, and or pessimism among asset classes, geographies and securities, UBS tries to opportunistically target asymmetrically interesting long and short positions. In all, UBS resorts to about 150 assets, has 11 trading scenarios, and uses other strategies.
Among them is that UBS is buying long-term or 30-year treasury, and selling Italian 10-year government bonds ahead of elections in Europe.
“That is the government that is most vulnerable to immediate or long term trend of euro. If you question the longevity of the euro beyond the next 3-5 years even a small question market would come in at a bad time for a country that has not recovered and not benefited from very low rates because the credit system is broken, and the banking system needs repair, so the money does not reach the intended target,” Pande said.
“This is asymmetric combination if the base case happen, we won’t lose money, but the bad things happens, bonds could rally,” Pande said.
UBS also likes energy equities, and so they have advised to long on energy equities and short on Brent.
Among other strategies, UBS went long on countries which were lagged a lot in terms of performance like Japan, Australia, and shorting bonds markets that were extremely vulnerable like Australia.
In all, Pande said they were not momentum players.
“Our approach is more thoughtful, extremely deliberate, and transparent to help our clients,” Pande said.
