Benjamin Bowler, Global Head of Equity Derivatives Research at Bank of America Merrill Lynch delivered a talk titled “Post-Central Bank Volatility: More Risk But More Alpha”. The discussion noted how central bank actions have us in a different bubble type environment and noted that stocks continue to move up with very little volatility. He also demonstrated that many markets have experienced high short term instability relative to recent price action and hedge fund performance has been very poor despite low market volatility.
He addressed central bank actions and how the increase in quantitative easing resulted in more volatility not less. For example, Japan had the largest balance sheet expansion and also experienced the biggest increase in volatility in 2016. Buying equity market dips and selling volatility spikes have both been effective strategies over the past couple of years which means that market shocks are now alpha generating opportunities.
Looking at the current state of the market he believes that VIX is greatly under pricing political and policy uncertainty. With VIX being so low, options for upside or downside participation are very inexpensive. He also noted that April VSTOXX futures are elevated in front of the French election next month and that US markets have yet to ‘wake up’ to the election. A takeaway statement I thought was very useful was that in this current low volatility environment options are a better risk management tool than going to cash.