Reacting to market volatility – do I need a money manager?

With markets in turmoil, the BOJ came out and said there would be no more rate hikes while financial markets are shaking, hinting that the next hike might not be until March 2025. The Yen carry-trade panic was over as quickly as it had begun. Unsurprisingly the market rallied, and the Fear index dropped. Of all the possible trades after the BOJ announced they would return markets to calm, the most obvious was betting that the VIX would return back into the teens.

The question is, if the VIX is an index, how can one position to make money on a move? Not only can one place bets on the direction of the VIX, you can also buy call or put options on the VIX. This is essentially betting on the volatility of volatility. The VIX options market reflects not just what traders think will happen with the S&P 500’s volatility but how much they expect that volatility to change. You can buy or sell VIX options depending on if you are betting on even more fear or a sudden drop in fear. It’s like betting on how jumpy the market will get about being jumpy.

The question is as an individual investor, are you equipped with the tools necessary to react and take advantage of these opportunities that the market presents? Fear and greed are both powerful emotions, and investing can be an emotional roller-coaster. Do you have the emotional discipline to avoid panic selling or FOMO buying? Do you have the knowledge to place the more nuanced trades such as betting on the VIX? Do you have the time to fully understand what is going on in markets, spot trends, and identify opportunities or dangers you might miss while you’re busy not being a full-time investor? Do you have access to proprietary research, analyst reports, and access to company CEO’s?

A professional fund manager might be the answer

However, before you go handing over your hard-earned money and forgetting about it, it is crucial to choose wisely. Not all fund managers are created equal. Find a manager with a proven long-term track record, who’s traded through several market cycles. Everyone can look like a genius during a bull market. Understand the investment methodology and their risk management practices.

Alignment with Your Objectives

Fund managers are not free, so make sure the fees they charge are justified by the performance and service they provide, and ideally, affirm that their financial interests are aligned with yours. Understand the fees involved, which may include, but are not limited to the following:

ESTABLISHMENT FEE

Establishment fees, also known upfront fee or entry fees, may be paid when you set up your managed fund account. Also check if there are Contribution fees that may be paid each time you make a deposit.

REDEMPTION FEE

There may be a fee charged when you sell or redeem fund shares, often intended to discourage short-term trading.

MANAGEMENT FEE OR EXPENSE RATIO

This is the most common fee and represents the annual cost of managing the fund, including management fees, administrative costs, and operating expenses. It’s normally expressed as a percentage of the fund’s average net assets. For example, an expense ratio of 1% means you’ll pay $10 per year for every $1,000 invested. This fee is designed to cover the fund manager’s fixed fees such as office rent, salaries, research costs and basically to keep the lights on.

PERFORMANCE FEE

Often funds charge an additional fee if the fund’s performance exceeds a certain benchmark. This is more common in hedge funds or actively managed funds. It is normally desirable to see that this fee uses a high-water mark, to ensure that investors are not charged fees for the same performance twice.

Example of high-water mark: Suppose a fund’s value starts at $100 per share, then drops to $85, and later rises back to $100. The high-water mark would still be $100. If the fund then increases to $110, the manager would earn a performance fee on the $10 (from $100 to $110), not on the increase from $85 to $110.

Compare Fees

It is important to understand all the fees that may be charged, since even small differences in fees can significantly impact your returns over time due to compound interest.

Co-Investment

When a fund manager co-invests in their own fund, several benefits arise for both the manager and the investors, which can enhance the overall attractiveness and performance of the fund. These benefits include but are not limited to:

• Increased commitment since they have skin in the game, aligning their interests with investors.
• Incentive to perform since their own wealth is tied to the performance of the fund.
• Enhanced trust and confidence, as investors will see the manager believes in the fund enough to invest their own money.
• Increased transparency since managers who have their own money on the line are more likely to be transparent about the fund’s strategies and performance, knowing that they are also affected by these factors.

While co-investment by a fund manager cannot guarantee success, it is often seen as a positive sign by investors.

Consider Tax Implications

While not a fee, the way a fund is managed can affect your tax liability, which indirectly impacts your net returns.

Risk Tolerance

Each person’s financial journey is distinct, shaped by their personal goals, individual circumstances, and risk tolerance.

Investors with a higher risk tolerance may be more inclined to choose funds with the potential for higher returns, but also higher volatility, whereas those with a lower risk tolerance may prefer more conservative options that prioritise capital preservation. Ultimately, Investors should assess their risk appetite and align choices with their long-term financial objectives.