Most still struggle to cope with the most extreme moves. Short volatility has an implicit positive correlation to equity market beta – in essence, if you’re short big moves, then you’re long small ones – and attempts to hedge can be difficult, given the tendency for assets to move in lockstep during periods of stress.
“Whenever you do short vol, you’re long delta so you tend to inherit a tail risk in a severe market selloff. It’s a problem we’ve seen at different points in history,” says Souli. “We saw a huge unwind in vol carry strategies in February 2018, but people want to return and create some alpha. In a situation where yields keep shrinking, it was clear to us we needed to find a product to settle that issue.”
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