The first session on the final day at RMC was a panel discussion titled, Panel on Long and Relative Value Volatility Trading and Tail Risk. The panel was moderated by Paul Leech from JP Morgan and panelists, who represented all major regions of the globe, were
- David Dredge CIO Convex Strategies at City Financial Investment Company
- Oleg Lugovkin, Portfolio Manager, Argentiere Capital
- Chris Rodarte, Portfolio Manager, Pine River Capital Management
- Pierre de Saab, Partner and Head of Asset Management, Dominice & Company
The discussion started off talking about the low interest rate environment, specifically in Europe, which has led to investors searching for yield. The result is derivative products that may offer some type of yield that is based on selling volatility. This in turn has created a large supply of volatility and cheaper options for those looking to get long volatility. It was noted that single stock volatility is priced relatively higher than index volatility.
There was discussion of how the panelists have altered their approaches based on the current low volatility and interest rate environment. It was pointed out that short volatility players are more leveraged, therefore they should be smart and hedge their exposure. If the market starts to behave differently with stocks coming under pressure, the supply of volatility may dry up very quickly.
The excess supply of short volatility in the Asian market was talked about extensively. A specific example is the proliferation of structured products that pension funds will take positions in that give them some sort of yield like returns.
An indication that volatility may start to move higher would be correlations of individual stocks increasing as well. One of the contributors to the low volatility environment has been sector rotations which results in decreased correlations and lower broad-based index volatility.
Finally, in the current environment, it was noted that implied volatility about 2 to 3 months out is overpriced. A panelist pointed out that there is a seasonality associated with the relatively higher volatility priced in for the October – November time frame. Despite volatility being relatively higher in that part of the curve, compared to history downside protection is cheap. As one panelist phrased it, “leveraged downside protection is very inexpensive”.