Conversations with Volatility Traders

I have been trying to post interesting articles relevant to volatility trading and VIX trading on a Linkedin Group I started. I contacted a few people from the group and had a few drinks to discuss their thoughts on the volatility market. Here are some highlights:

1) The volatility space is extremely crowded. There are many many funds utilizing systematic strategies to extract a return from the VIX products. This in turn makes volatility an ‘asset’ class over a true source of alpha. The ‘easy’ money is gone. I posted this article on twitter but it corroborates much of what they say.

2) Despite this, there is still significant amount of assets applying a percentage of AUM towards VIX hedging.

3) Sell side research on volatility is mostly catering to systematic and quantitative strategies. Therefore it doesn’t take into account much of the short term opportunities available in any given time period. As implied volatility level changes, skew, and the term structure change, the sell-side strategies may be late to adapt.

4) Most timing strategies look to VIX itself to time VIX. There-in lies an opportunity to use other asset classes for signals or inputs into timing volatility. I use a breadth measure. Like anything, it’s right sometimes and wrong sometimes, it’s important though to be consistent and not chase the newest indicator.

5) There was a long discussion on career trajectory. The consensus is that large funds would require ‘services’ of individuals or funds with knowledge of hedging and volatility. In other words, a pension fund may either invest in tail risk funds or high a trader or team to implement a strategy in house. There isn’t much interest in stand-alone volatility arbitrage funds as the focus is too narrow and too complicated for many investors. It would likely be as part of a multi-strategy quantitative book so that manager would need expertise in statistical arbitrage, fixed income arbitrage, etc. But there will always be room for prop and individual traders.

6) Be mindful of the vol of vol. It is NOT reflected in the VVIX. When these strategies go wrong, just like any carry trade, the effects will be large. All the strategies will look to hedge or switch long at the same time. Be careful out there if short volatility!


~ by largecaptrader on July 13, 2013.

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