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Turbulence in Perspective


The severe market turbulence of the last few days tested not only portfolios, but also nerves, as many were forced to travel across a wide range of emotions in a very short time.

The following charts help put this in perspective. Last Friday, our implied Risk Indicator was at its 4th highest level since March 1999, reaching its 98th historical percentile. It was topped only by the May 2010 "flash" crash, the peak of the European banking crisis in August 2011 and the Lehman crisis. This makes the recent Greece crisis look like a blip in comparison.

Data source: ALPIMA

What is even more interesting is to look at daily changes in our risk indicator, charted below. Viewed this way, last Friday surpassed even Lehman, making it the largest daily change since March 1999. If you ever needed another proof that markets are non-linear, highly unpredictable and statistically non-normal, this was a prime one. Traditional bell curves and standard deviations are not capable of handling this.

Data source: ALPIMA

Much as a sudden burst of unexpected turbulence reminds airline passengers of the need for seat belts, the last few days were a clear reminder that investment discipline, systematic risk control and the hedging of unwanted risks such as FX are of paramount importance.

It is with these principles in mind that we designed, and are now building, our platform.

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