Volatility of an Impossible Object

Christopher Cole of Artemis Capital Management has an excellent new piece of research out there and I just wanted to highlight some parts out of it today. He specifically targets traditional empirical views on things and mentions how the efficient frontier is no longer a valuable tool, and how fear and safety are both weak to live by in perspective:

In a world where global central banks manipulate the cost of risk the mechanics of price discovery have disengaged from reality resulting in paradoxical expressions of value that should not exist according to efficient market theory. Fear and safety are now interchangeable in a speculative and high stakes game of perception. The efficient frontier is now contorted to such a degree that traditional empirical views are no longer relevant.

He emphasizes that volatility-of-volatility as an important dimension in investing going forward:

In this brave new world volatility is an important dimension of risk because it can measure investor trust in the market depiction of the future economy. The problem is that the abstraction of the market has become an economic reality unto itself.

He makes a case for ditching the traditional business school route; in the new world, we must be able to philosophize ideas that question traditional thinking:

You didn't get your MBA to be an amateur philosopher - your job is to make cold-hard decisions about real money - not read Plato. You are out of luck. For the next decade this market is going to reward philosophers over students of business. Why? Because the modern investor must hold several contradictory ideas in his or her head at the same time and none of them really make any sense according to business school case studies.

On black swans:

What are the “unknown unknowns”? Ask a psychic… I have no idea (that is the point) but if someone put a gun to my head and forced me to guess I would answer vol-of-vol itself. The more traders use ‘uncertainty’ as a market timing indicator the more unstable and cross-correlated markets will become. If you extend that concept to high frequency market microstructure and take it to the logical extreme you may see the problem.

He also mentions why he finds it a challenge to market his ideas because they are unorthodox, when in fact, those are the ideas that need particular attention:

During my presentation they asked what “box does your core strategy fit into?” I told them it didn't cleanly fit into any of the hedge fund strategy “boxes” they routinely index. My response was not well received and I was told verbatim that I had a “marketing problem” if my fund couldn't “fit into a box”. I understood right then and there why they had diversification issues. I look at things very differently…. that marketing problem is a competitive edge

Read the full piece here:
Artemis