The more than 4% drop in the S&P 500 last week was not unusual. In the current quarter alone, the large-cap index has risen seven times by a similar amount. How do professional investors trade in the midst of such volatility and what are they buying? Hedging Bets Speaking to CNBC “Pro Talks,” investment director Neil Veitch of SVM Asset Management said he manages risk by being open to any strategy that offers the “best return.” One option on a “very, very short term” basis, according to Veitch, is an inverse volatility ETF (exchange-traded fund). These ETFs, such as the ProShares Short VIX Short-Term Futures ETF and Short VIX Futures ETF, allow investors to bet on a stable market in times of volatility. This is done by effectively shorting the VIX, a measure of volatility forecast based on S&P 500 index options. Some ETFs even use leverage or debt to boost returns. Veitch, who manages about £200 million ($213 million) across three funds, is also proposing another medium-term hedging option against equities: US Treasuries. Historically, bond prices have tended to rise when stocks fall. They are considered safer than owning stocks. “Owning US Treasuries with a two-year maturity at 4% is just as good a place for your money at this particular time,” he added. Rampant inflation has pushed interest rates, or yields, on short-term US government debt to 4.13% from 0.76% at the start of the year. Veitch believes the market is currently responding to the “increasingly aggressive rhetoric” of the Federal Reserve and other central banks as they attempt to tame inflation. “The path of inflation and how central banks respond to it determine the path of the markets in the short, short and medium term,” he said. Finding value If that’s the environment, how does Veitch find value in stocks, and what does he buy? The investment director pointed to a handful of stocks “plagued” by consumer confidence concerns. “Now that the stocks have fallen and in many cases by 50%,” said Veitch, who also manages the SVM World Equity Fund, “they are starting to become more attractive.” Micron Veitch announced that it sold shares of chipmaker Micron Technology earlier this year. Shares of the semiconductor company have fallen 48% to $50 since January. The fund manager said the stock would be “interesting” if it fell to about $40 a share in the future. “I suspect Micron’s next earnings update will be bad,” he said. “It’s going to be very interesting to see how the market reacts if the stock were to fall aggressively. I’d expect that sell-off to be bought.” JD Sports Veitch said London-listed JD Sports, a global sportswear retailer, had a “very interesting medium-term story” as the company expanded into the United States and Europe by targeting the “premium” — segment. The Manchester, England headquarters, with more than 2,000 stores in 19 countries, has seen its stock fall by more than 50% since its recent peak in November last year. SVM’s UK Growth Fund has allocated 2.8% of its portfolio to JD Sports. The fund manager said select retail stocks would likely rise next year if inflation fell significantly. “It doesn’t make sense to only select retailers across the board. We have to try to understand what the medium-term dynamics are, what their long-term profit potential is,” he added.
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