Volatility Regime Update - OpenMind Capital

OpenMind Capital investment philosophy is based on the concept of Adaptive Investment. We adapt our strategies based on the concept of Volatility Regime Shift and we use our proprietary Effective Volatility Regime methodology to assess market conditions. Given the recent market drawdown, we thought it may be of interest to provide you with an update on our Volatility Regime Indicator.

We use our volatility regime signals to increase positions in higher-risk assets/strategies during good volatility regimes, and invest in lower-risk assets/strategies during bad volatility regimes. Much of academic research* demonstrates that portfolios that take less risk when volatility is high produce large, positive alphas and increase factor Sharpe ratios by substantial amounts. 

Last week, on Friday the 2nd, our bad volatility threshold was reached on the S&P 500 Index as 6 sectors out of 10 went in Bad Volatility Regime (our threshold is 5). Therefore, we reduced exposure to the S&P 500 Market in our Long/Short US Equity product. In term of Stock Selection, we moved to our defensive Model early this week to provide an additional cushion to our strategy.

We also decreased allocation to US and Canadian equities in our balanced mandate on Friday the 2nd.

The longer term picture of our Volatility Regime Indicator for the Large Cap US Equity Market is shown in the graph below.

For the Global Equity Market, the threshold was reached one day later (Monday) as the Asian Market reacted to the sell-off in the US Equity Market Monday morning (Feb 5).

The longer term picture of our Volatility Regime Indicator for the Large Cap Global Equity Market is shown in the graph below.

For more information on our investment process, please visit our web site at: www.openmindcapital.com .

* Please refer to the following article: Volatility Managed Portfolios by Alan Moreira and Tyler Muir - Yale School of Management - February 1, 2016. Volatility Regime shifts present significant challenges for investors because they cause performance to depart significantly from the ranges implied by long-term averages of means and covariance's. But regime shifts also present opportunities for gains.