If there were a trifecta of features desirable to investors, it would likely include steady, linear, and above-average returns. These attributes, on the surface, seem innocuous and even aspirational. However, when prioritized at the expense of underlying realities, they can lead to disastrous outcomes. Consider Bernie Madoff, who promised unsuspecting investors a steady, non-volatile return profile, only to defraud them of billions of dollars. Or the Nobel Prize-winning fund managers from Long Term Capital Management (LTCM) who pursued low volatility options strategies that ended in a spectacular blow-up, requiring a bailout from the Federal Reserve. And perhaps more relatable, the 2008 crisis precipitated by a cascade of financial derivatives that unravelled because they were built on the assumption that real estate market volatility was manageable, and prices only go up.
