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Alternative Market Briefing

Many CTAs have become more short-volatility in the last five years

Friday, August 01, 2014

Benedicte Gravrand, Opalesque Geneva:

Quantitative easing has reduced and then suppressed volatility for the last five years. So analysts at R.G. Niederhoffer Capital Management recently examined if there had been a tendency for CTAs and hedge funds to adjust their styles to become more 'short- volatility' (or more 'risk-on' or 'long-equity') in recent years.

"Volatility, both implied and realized is at near-record lows across multiple market sectors," they note in the firm's Q2 investor letter. "For example, the VIX index of equity implied volatility has declined to levels not seen since February 2007. Looking at realized volatility, the S&P reached its lowest level of movement since 1995 just a couple of weeks ago, and elsewhere many other sectors are far below average." However, the report adds, this is finally coming to an end.

The VIX went down by 46% in the last five years (-6% YTD), and is now priced at 13.33. In January 2007, it was 10.42. The index, also know as the marketís "fear gauge," spiked by 32% on Thursday 17th July and fell the next day, coinciding with bad news from Ukraine and the Middle-East.

Realized volatility is also known as historic volatility and is the actual variance in the price of an option over time. Implied volatility is th......................

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