The first session following lunch at RMC today was a panel discussing Volatility as an Asset Class. The panel was moderated by Jonathan Havice from Jeffrey Slocum & Associates. The members were Donald Dale of Derivaguard Advisors, Tarik Dalton from the Department of the State Treasurer of North Carolina, Dennis Davitt from Harvest Volatility Advisors, and Kevin Duggan from the Ontario Teachers’ Pension Plan.
The first question was whether the panelists consider Volatility an asset class. One statement was that it is more of a tool than an asset class. Also, a thought was that calling volatility an asset class can be a difficult sell. A different perspective was that you can view volatility as an asset class because it may be diversified and there is a premium that may be harvested from volatility. Something that makes considering volatility as an asset class is that it is difficult to allocate a portion of a portfolio to volatility. Another issue surrounding considering volatility as an asset class is then you need to determine a benchmark to measure the performance of volatility. Finally, from a fiduciary perspective volatility needs to be considered from an equity management perspective.
The discussion moved on to talking about the potential benefits of volatility strategies. The first thought along this line is that volatility can be a good diversification tool and that the days of being allocated only to bonds and stocks are in the past. One panelist noted that a presenter yesterday mentioned that volatility (downside) is the enemy of compounding returns. A benefit of using volatility products is a good method of reducing a potential drag on compounded returns. Another approach is to look at volatility as a liquidity buffer as during true panic reducing exposure is very difficult. SPX and VIX derivatives are very liquid instruments that have had low slippage costs associated with implementing a hedge in turbulent times.
Tail hedging was the next topic and it was mentioned that some tail hedging strategies are too costly when you are hedging a 100 year event. It was discussed that many tail hedge funds have not done too well in the current environment and that if a tail fund loses value but an asset manager is benefitting from a strong equity market the manager will be happy with overall performance. Expectations should be set when a tail hedge strategy is implemented in that there will be diversification benefits. With the stock market gaining 185% since the March 2009 lows there should be an expectation that tail hedges would lose value.