At last year’s conference, Eduardo Repetto, Chief Investment Officer and Head of Research at DFA, presented on cross-sectional dispersion and the decay of volatility. By virtue of the topic name alone, many were left with blank stares upon their faces. Nonetheless, his presentation proved one of the most insightful. This time around, Eduardo, investigated how volatility has fared under present market conditions.

The foundation from which we work is that volatility decays slowly, and high volatility is more correlated to negative returns. Moreover, volatility is also what provides exceptional positive returns. With that said, what is today’s volatility?

There are many measures of volatility. A common metric is the Chicago Board Options Exchange Volatility Index (VIX). This measures the implied volatility of S&P 500 index options. The average VIX from 1/1990 to 7/2009, is about 20%. In the second half of 2008 through the beginning of 2009, the VIX reached as high as 80%. As of 9/28, the VIX was around 24%.

On 9/30/09, we saw the S&P 500 drop over 1%, only to rebound to breakeven by the end of lunch. The other day, we saw the S&P 500 gain 2%. Volatility is still with us, and it is still high, but it is remarkably lower than one year ago. This is not intended to derive some prediction about future volatility; rather, it is intended to show the nature of capital markets.

Managing risk must be a major component of every good investment advisor’s value added. Successful investing involves capturing the natural volatility of capital markets and removing the unsystematic risk of individual companies.

Dimensional Fund Advisor’s (DFA) Annual Investment Symposium took place in Austin, Texas last Thursday and Friday. The two-day event is a rigorous agenda of topics that runs the gamut from high-level economics and statistics to regulations and operational views of the inner-workings of their mutual fund offerings.

From the infamous Professor Eugene Fama (University of Chicago) to the equally renowned Professor Ken French (Dartmouth College), and including a litany of investment-oriented academics; this annual conference provides a constructive forum to learn and discuss all of the current and cutting edge high-finance topics of the day.

In the coming posts, we’ll be sharing the presentation high-points of the conference covered by the brilliant minds at Dimensional Fund Advisors.