Thu, Jul 20, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

EDHEC research paper reveals benefits of diversifying equity portfolios with volatility derivatives

Wednesday, June 06, 2012
Following the collapse of worldwide equity markets in 2008, and the subsequent rally in long positions in equity volatility, interest has grown in the possible use of equity volatility derivatives as diversifiers for traditional and alternative portfolios. In a new publication entitled “The Benefits of Volatility Derivatives in Equity Portfolio Management,” produced with the support of Eurex Exchange, EDHEC-Risk researchers show how volatility derivatives can be used to optimise access to the equity risk premium in a controlled volatility risk environment, and to engineer equity portfolios with attractive downside-risk properties.

The key findings of the research are as follows:

  • A long volatility position shows a strongly negative correlation with respect to the underlying equity portfolio and adding a long volatility exposure to an equity portfolio results in a substantial improvement of the risk-adjusted performance of the portfolio.
  • The benefits of the long volatility exposure are found to be the strongest in market downturns, where they are needed the most.
  • The benefits of adding volatility exposure to equity portfolios are also found to be robust with respect to the introduction of trading costs associated with rolling over volatility derivatives contracts.

Noël Amenc, Director of EDHEC-Risk Institute, said, “This research proposes a novel approach to the design of attractive equity solutions with managed volatility, based on mixing a well-diversified equity portfolio with volatility derivatives, as opposed to minimising equity volatility through minimum variance approaches, and shows that trading in volatility index futures or options can provide access to the equity risk premium while allowing for explicit management of the volatility risk budget.”

Michael Peters, member of the Eurex Executive Board, said, “As a longstanding partner of EDHEC-Risk Institute’s research, we regard academic research and education as one major element of our business strategy. This cutting-edge academic research on optimal approaches to investing in volatility proves the potential usefulness of trading volatility futures and options in an equity portfolio management context. My expectation is that the study will be welcomed by the international investment management community.”

A copy of “The Benefits of Volatility Derivatives in Equity Portfolio Management” can be downloaded here: Source

fg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Hedge fund manager Crispin Odey says it's now more likely the market will crash[more]

    From Bloomberg.com: Crispin Odey, who made money for a second straight month by sticking to bearish equity bets, said the chance of a market crash is rising as growth slows and the Federal Reserve normalizes interest rates. The credit cycle boosted by loose monetary policy has peaked and there's a w

  2. Little-known cryptocurrency hedge fund seeks $200m in SEC filing[more]

    From Coindesk.com: A little-known, newly established hedge fund is seeking to raise $200m to invest in cryptocurrencies, according to regulatory filings. The bid by Cryptocurrency Fund LP to raise the money was revealed in a Form D submission to the US Securities and Exchange Commission (SEC), dated

  3. FinTech - Bitcoin hedge fund director: ICOs are having a 'eureka' moment, Big data and analytics: Not just for quants anymore, Data breach of a single firm impacts systematic risk (and cost of capital) for the firm's entire sector[more]

    Bitcoin hedge fund director: ICOs are having a 'eureka' moment From Coindesk.com: The director of one of the first bitcoin hedge funds offered praise for initial coin offerings (ICOs) today, arguing in an investor note that the novel fundraising method is already showing signs of

  4. Already above average, Singapore high-networth investors add hedge funds and alternative investments[more]

    Komfie Manalo, Opalesque Asia: An above-average proportion of Singaporean HNW wealth is allocated to alternative investments - the majority of which is held in hedge funds, according to the latest research by ReportLinker. In its report entitled, Wealth in Singapore: HNW Investors 2017

  5. Launches - Crypto boom: 15 new hedge funds want in on 84,000% returns, Crypto madness is striking VCs as Union Square analyst leaves to start new fund[more]

    Crypto boom: 15 new hedge funds want in on 84,000% returns From Forbes.com: With 43 projects raising $1.2 billion in initial coin offerings since May 1, according to Nick Tomaino's The Control, and with stratospheric returns for so many ICOs -- 82,000% for Ethereum, 56,000% for IOTA, 44,