Govert Heijboer from True Partner Advisor and James Murray from NSW Treasury Corporation split the duties for a discussion titled Implementing Long Volatility Exposures for Hedging and Alpha today in Hong Kong.

Murray led off by discussing risk management and the objectives of long volatility risk management strategies.  He noted that there is no free lunch when getting long volatility exposure and strategies are a trade-off between convexity, timing, basis and time decay.  A final thought is that long volatility strategies are a portfolio management tool and should be thought of in the context of a broader portfolio.

Heijboer followed up and noted that long volatility guys seem to be in the minority at conferences like this and being long volatility is like being the underdog.  He noted that this has been the year of the underdogs, naming the Chicago Cubs as a perennial underdog who did good in 2016.

He listed different ways to be long volatility such as owning a variety of options, listed volatility derivatives, or using over the counter solutions.  He rhetorically asked why on earth you would want to be volatility.  He answered his question that volatility works when everything else fails.  As an example he shows the performance of the Eurekahedge CBOE Long Volatility Index from 2008 when it was up over 45% for the year.

As far as implementation he discussed the high negative carry associated with being long volatility.  Both time decay and term structure decay have a negative impact on being long volatility.  To circumvent this cost he suggests an active trading strategy.   His firm focuses mostly on short dated listed equity index options to long volatility exposure.