Tanuj Dutt, CFA from Nikko Asset Management and Selim Piot from Barclays Capital teamed up to deliver a session on Implementing Short Volatility Strategies at the 2nd Annual CBOE RMC in Hong Kong today.
Piot led things off by discussing how short volatility strategies may be implemented. He noted the diversification benefits of substituting a part of equity risk with short volatility exposure and followed that thought stating that a portfolio of short volatility across regions and different asset classes increase the diversification benefits. He presented either variance swaps or using options and delta hedging as alternatives to gain short volatility exposure. With listed options he highlighted the price transparency of exchange traded options, but also noted that daily trading is required to delta hedge and there is potential path dependency when using options get short volatility exposure.
Dutt then followed on and his presentation focused on the diversification benefits of volatility exposure. He noted that he is not a volatility specialist, but is using volatility as an asset class to diversify his portfolio. His example of how diversification using traditional asset classes may not work in the future used a scenario where bonds sell off and stocks follow the bond market lower. In this feasible situation being diversified using only those two asset classes would not offer the hoped for results. He demonstrated that the correlation between stocks and bonds has moved from inverse to positively correlated periodically in the past.