Every three months the Federal Reserve conducts a survey titled, “The Senior Credit Officer Opinion Survey on Dealer Financing Terms”.  This report comes in summary form as well as specific responses to 79 questions that are asked each quarter.  Periodically there are some extra questions placed at the end of the survey, needless to say the academic in me got pretty excited when I saw questions 81 through 89 were titled Special Questions on Client Trading in Equity Volatility Products. 

As a precursor to the results it was noted that volatility has been low and that the financial press has been reporting that investors that may have been net long volatility were now net short.  The volatility oriented questions were divided into two general types.  There were four questions about the use of volatility by client types (Hedge Funds, Exchange Traded Products, Mutual Funds, Pension Plans, Insurance Companies, Separately Managed Accounts, and Non-Financial Corporations).  The remained of the questions touched on counterparty exposure and instruments used by clients to take positions with respect to equity volatility. 

Some things I found interesting in this report include:

  • There was a question about the relative use of volatility across all types of investors.  The majority of firms responded that the number of clients using volatility has remained steady over the past couple of years.  However, mutual funds and hedge funds use of volatility in their investment strategies has been growing. 
  • A significant question was, “On net, how are your clients positioned for a sustained increase in volatility?”  Half the responses stated that most clients are net long or more clients are net long that net short in the hedge funds space.  22.2% of responses stated that more clients are net short than net long volatility in the hedge fund area.   Across all firm types the responses favored long volatility versus short volatility.  The belief of the popular press that short volatility is a ‘crowded trade’ may require a second look after seeing the Fed survey results. 
  • In product usage VIX futures and options scored higher than the VIX related ETPs as the instrument of choice for hedge funds to gain exposure to equity volatility.  However, the most heavily used instrument is exchange traded equity options which may reflect the preference of hedge funds to focus on individual stocks. 

There’s a lot more to this report and I could spend all day slicing and dicing the numbers.  If you want to dive into all the questions about volatility the full report can be found at https://www.federalreserve.gov/data/scoos/scoos_201709.htm