Jonathan Ruffer: Get ready for more

The recent volatility in share prices is just the beginning, says Jonathan Ruffer, co-founder and chairman of Ruffer Investment. “We are confident that the earthquake will happen, and more confident than we have been that it will happen in months, not years,” he said in his latest quarterly review, notes The Daily Telegraph. The trouble is that investors have “come to believe the assets they own are safer than they actually are”. Volatility (the scale and frequency of fluctuations in price movements) in stock and bond markets had, until February, been falling ever lower, and volatility is “how the majority of the asset-management industry judges risk”.

Yet in reality, the risk of loss has been rising, not falling, across the board. “Financial engineering” has seen the level of borrowing on corporate balance sheets rise, making equity ownership riskier. Corporate-bond portfolios have lengthened in duration, meaning they are more sensitive to interest-rate changes. And investors are no longer reaping sufficient rewards from property and other alternative assets to compensate for how illiquid such assets are.

This is why volatility is a “central theme” in the investment manager’s thinking, says the Financial Times. Last year Ruffer made headlines after spending $200m on derivatives contracts protecting against a rise in volatility. When US stockmarkets cratered earlier this year, this paid off handsomely – although the “not inconsiderable amount” made on these derivatives positions still did not entirely offset the losses made in other investments in the fund’s portfolio during the first quarter.