Nancy Davis runs Quadratic Capital Management, where her somewhat contrarian view is that investors, all too complacent, are in particular need of insurance against financial trouble
tocks have recovered from last fall’s crash, low interest rates stretch out to the horizon and the VIX volatility index is half what it was at Christmas. Sit back and coast to a comfortable retirement.
Those options are cheap, for two reasons. One is that, at the moment, there is no steepness: Yields on ten-year bonds are scarcely higher than yields on two-year bonds. The other is that the bond market is strangely quiet. Low volatility makes for low option prices. The fund showed its worth in the first week of August, climbing 2% as the stock market sank 3%. But it needs a much bigger shock to stock or bond prices in order to get big. It has gathered only $58 million so far. A crash had better arrive soon; IVOL’s call options expire next summer. Quadratic, moreover, needs to somehow scale up without inspiring knockoff products from ETF giants like BlackRock.
There may be a sour grape, but there’s also truth in her current philosophy that hedge funds are not such a great deal for investors. ETFs, she says, are more liquid, more transparent and cheaper.
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