Tue, Sep 16, 2014
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. Investing - Big hedge funds show interest in Alibaba, Maglan joins other hedge funds in rush to Argentinian assets[more]

    Big hedge funds show interest in Alibaba From Hereisthecity.com: …Three other major hedge fund investors who have shown interest in the IPO are Dan Loeb of Third Point, David Tepper of Appaloosa Management and Dan Benton of Andor Capital Management. All three were among the roughly 800 p

  2. Investors looking at other sources for hedge fund-like returns[more]

    Komfie Manalo, Opalesque Asia: Investors who are always on the lookout for higher gains are looking at alternative sources of income, particularly exchange-traded fund industry that generates hedge fund-like returns, according to

  3. Investors move capital out of Scotland ahead of referendum[more]

    Benedicte Gravrand, Opalesque Geneva: Ahead of Scotland’s independence referendum on September 18, asset managers, investors and pension savers are moving billions of pounds out of the country,

  4. Indices - Greenwich Global Hedge Fund Index up 1.57% in August (+4.22% YTD), Eurekahedge Hedge Fund Index rebounds in August gaining 1.36% (4.22%), Lyxor Hedge Fund Index was up 0.9% in August (YTD +1.7%)[more]

    Greenwich Global Hedge Fund Index up 1.57% in August (+4.22% YTD) The Greenwich Global Hedge Fund Index ended the month of August up +1.57%. Equity markets were up in August with the MSCI World Index up +2.00%. This was primarily driven by the performance of the S&P 500 which was up +4.

  5. Alpha Strategic buys stake in Premium Point Investments[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: Alpha Strategic plc, a affiliate of