Reply #7: Hedge Funds Might Worry Where the Volatility Went [View All]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_currier&sid=a0Uvs5MO0vTw

Nov. 30 (Bloomberg) -- In this strange year of 2004, many of the big news stories have been about what didn't happen.

Contrary to widespread concerns, terrorists didn't strike before Nov. 2 to disrupt the U.S. elections. Neither did the lawyers afterward.

Deflation and inflation both failed to derail the world economy. In defiance of what all the smart money was sure would happen, rising interest rates didn't knock the bond market for a loop.

So it's only fitting that the stock market produce a ``didn't'' story of its own. Volatility -- the frenetic fluctuations that seemed to have become a standard feature of modern stock-market life -- did an abrupt vanishing act. After a nine-year run of two-digit swings up and down, the Standard & Poor's 500 Index has shown only single-digit changes all through 2004.

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Volatility's most notable new constituency is the rapidly growing hedge-fund industry, many of whose members invest in ``long-short'' style. The idea is to reap a reward, known in the trade as ``alpha,'' no matter which way markets are moving.

Alpha doesn't come easy. It doesn't accrue naturally to anybody, the way long-only investors benefit from bonds' interest payments and stocks' inherent tendency to rise as economies grow. Generally, alpha must be gained at the expense of someone else, in a zero-sum game.

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