Economics is a field seemingly rich with catch-22 scenarios, chief among them being the fact that investors responding to economic tumult can actually cause that tumult to become even more pronounced. Such is the finding of a recent analysis from the Chicago Tribune, which notes that, following several years of economic uncertainty, many investors are acting cautiously, even guardedly, fearful of further economic fallout. The great irony here, according to the Tribune, is that this investor behavior may actually be increasing market volatility. The new analysis has earned the attention of economist Sharath Sury , who responds with additional insight into current financial realities.
Sury is a leading financial economist who currently chairs the Sury Institute for Financial Innovation and Risk Management, in addition to having served on the faculty at both the University of California and Santa Clara University. He has responded to the new Tribune analysis with a press statement. “In some ways, market volatility is a case of ‘perception is reality,’” explains Sharath Sury. “Volatility in the capital markets can be exacerbated when investors try to anticipate it, or to guard against it. Indeed, we've seen that even traditional ‘buy-and-hold’ investors have recently adopted a more tactical orientation. These investors now tend to engage in ‘risk on’ and ‘risk off’ trades.”
The economist continues with his analysis of current investment trends. “Importantly, we are beginning to see leading investors shift away from penalizing slight ‘style drift’ and in fact encouraging successful active managers to do just that-to truly be active,” notes Sharath Sury. “If investors hold active managers to minimal tracking error constraints, the ability to outperform, or to underperform, becomes far more difficult.”
Sharath Sury concludes with some thoughts for investors. “If investors choose to so restrict their active managers, they may be better off investing in index funds,” he opines. “Successful active managers should be given wider latitude, within predefined parameters, to intelligently navigate away from the benchmark in the pursuit of incremental risk adjusted returns.”
Sury’s insights affirm the basic findings of the Tribune analysis, which notes that “plans to ‘de-risk’ entire portfolios, more regular reviews of strategies and greater inclusion of explicitly active absolute return or hedge funds within wider portfolios all potentially create more volatility in the underlying markets,” even if all of this precautionary activity is essentially done at the margin for the investor.
Sharath Sury is an internationally-renowned expert in economics and finance. An award-winning educator and sought-after lecturer, he currently serves as the Chairman of the Sury Institute for Financial Innovation and Risk Management (SIFIRM) and an adjunct professor of financial economics at the University of California. SIFIRM’s diverse panel of economic experts, whose initiatives have included Boards with Nobel Laureates, pioneering academics, and leading investment CEOs, seeks to bring increased innovation and devise new tools and techniques for addressing the world’s financial issues. Additionally, Sharath Sury has been quoted for his expert opinion in Bloomberg, MarketWatch, Reuters, Fund Strategy, The Hedge Fund Law Report, and other noteworthy publications.
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Original Source: Sharath Sury: Investor Behavior Could Cause Increased Volatility