The final panel discussion of the conference was moderated by Robert McGlinchey who is Managing Editor of Derivatives Intelligence and Derivatives Week. The participants were Zoltan Eisler, Portfolio Manager for Directional Strategies at Capital Fund Management in Paris. Dr. Christoph Gort a Partner at SIGLO Capital Advisors, and Neale Jackson who is a Portfolio Manager at 36 South Capital Advisors.
The first questions was – is volatility an asset class?
Jackson stated volatility must be an asset class. He referred to an earlier presentation that showed how volatility is tied to market correlations.
Eisler discussed taking directional positions on volatility. He also believes volatility is an asset class due to the diversification benefits that may be garnered from including volatility in a portfolio.
Gort agreed that volatility is an asset class and mentioned the ‘bang for the buck’ you can get from volatility related positions
How are you positioned with respect to volatility?
Gort said his firm typically might invest 10 to 15% or a portfolio in an alternative asset. The goal is to include uncorrelated asset using this part of a portfolio. A cheap long volatility strategy is ideal for this part of the portfolio.
Zoltan pointed out that there are multiple methods that may result in being either long or short volatility. He noted that being long volatility is very different than being short volatility. The difference stems from the danger in being short volatility if it is not managed well as volatility may move up very quickly.
The group then talked about quantitative versus fundamental strategies. Jackson mentioned that 2008 is still fresh in our memories so that it may continue to dominate our thinking. We may be worried that the world may go ‘bang’ again and we will not be able to predict the black swan that makes this happen. By definition a black swan is something that may not be foreseen.
The participants were asked how to benchmark to volatility –
Jackson said the benchmarking may depend on what type of strategy is being implemented as part of the definition of a proper benchmark is that it must be appropriate. The appropriate benchmark can be difficult to determine with respect to volatility.
Gort said that a benchmark can also be a method that dictates how to allocate assets in a portfolio. He mentioned the indexes that CBOE offer being helpful as they often illustrate returns based on a simple set of rules. (www.cboe.com/benchmarks) However, the best assessment of the performance of volatility traders is probably best when compared to peer performance.
Zoltan noted that using a benchmark to asses a manager can be useful as it may indicate whether or not the manager is following a stated strategy.
The participants started discussing correlations. Gort pointed out that there should be causality with correlations. He used a common illustration – there is actually a 0.80 correlation between how short fashionable skirts are relative to the stock market’s performance. That’s nice, but there is no causality in this figure.
Are there challenges in describing volatility strategies to clients?
Gort mentioned that is not too much of a challenge. The challenge is that many managers and investors are reluctant to break from the heard and that risk may not be worth the reward if the payoff is not attractive enough.
The group was asked about suitability of VIX for clients and if this is an issue.
Jackson mentioned that VIX suitability goes along with the education process.
Eisler said that their clients are mostly large institutional clients that are fairly sophisticated. The thing that needs to be explained is the risks associated with gaining volatility exposure.
A question from the audience was about the desire clients may be expressing for volatility exposure
Jackson noted that investor’s memories are fading a bit with respect to the market in 2008, but he is still seeing interest in volatility.
Eisler noted there is a slow trend to accept volatility, but it is occurring.
Gort added that trend of interest is upward sloping, but the interest is muted when the equity market is acting well and comes back whenever there is a negative period for equities.
Another question from the audience was if the group was seeing interest in other areas of volatility –
Gort said the ideal scenario is to find volatility mangers covering volatility across the spectrum of asset classes.
Eisler said his firm has only had exposure to listed markets. Now that there are listed volatility derivatives there are more opportunities to gain direct volatility exposure.
A final audience question was if volatility is a strategic or tactical asset class –
Gort said short volatility is more strategies as positive long term returns are expected. It is more tactical when long volatility strategies are being implemented. Eisler said this was an excellent explanation of how to approach volatility.