Following lunch there was a panel discussion – Trends in Institutional Options and Volatility Product Usage led by Dan Mikulskis from Redington Partners. The participants were Chris Limbach of PGGM Investments, Mark Mehtonen from Ilmarinen Mutual Pension Insurance Company, Sebastian Richner from Swiss Life Asset Managers, and Brendan Walsh of Aviva Investors Global Services.
What asset classes do institutions tend to use options in?
Mark – using options and volatility as an asset class for 10 years – his firm uses options across several specific asset classes.
Brendan – his firm has macro views they trade around – he has tried to leveraged their macro view using option strategies.
Is the institutional preference to be net long, short, or neutral gamma and vega?
Sebastian – he uses a screen to determine if stock replacement strategies and put selling strategies to enter positions and feels there is attractive opportunities through selling puts. Through selling puts his firm is approaching trades as being short volatility.
Are there challenges in explaining and justifying option based strategies to the ultimate stakeholders or regulators of the institution?
Chris – in the low yield environment there is a shift in the board of the pension funds to be in full control of assets under management. He feels this has led to a focus on simple strategies. He also mentioned he considers volatility as an asset class.
Sebastian – states that there are not issues explaining strategies inside the organization, but at times there are external managers that need plain vanilla explanations.
Brendan – stated at an absolute return manager he is expected to employ more exotic strategies. In the past he has taken clients through the education process. He said it is important before putting on a position that he has conveyed the risk and reward of a trade to interested parties.
How has internal risk management techniques had to evolve to accommodate growth in options based strategies and the associated non-linear risks?
Brendan – a challenge for risk managers is the non-linear nature of option positions – this involves having the proper technology and understanding of risks on the desk.
Chris – his firm bases risk parameters around the diversification of the portfolio.
Sebastian – the risk of a portfolio may be adjusted based the client’s desire to be hedged or un hedged.
What is the role of VIX?
Brendan – comments on the tremendous growth in liquidity of VIX.
Sebastian – his firm has brought on an employee to explore using VIX and he reiterated Brendan’s comment about how the increased liquidity of the market has made it more desirable to trade.
Mark – stated that VIX can a good way to get quick exposure to volatility.
What other assets or products are people looking at?
Brendan – mentions that often lack of liquidity can may entering a new market difficult, especially in the volatility space.
Chris – his firm takes a little bit longer time frame outlook for volatility trades that more actively traded funds like hedge funds.