Rising volatility is motivating asset owners to take a close look at investment strategies that mitigate risk or seek to find alpha from the choppy, unsettled markets many see on the horizon.
Volatility managers running long- and short-volatility strategies and tail-risk specialists report a sharp rise in inquiries and investment, particularly from institutions.
Sources said this year's modest increase in volatility — the average value of the Cboe Volatility index year-to-date through June 30 was 16.322 compared to 11.090 in 2017 — and ongoing concern about the impending end of the equity bull market has swelled the pipeline of potential new business for institutionally oriented volatility managers.
The consensus among volatility specialist managers interviewed forecasts a return of the VIX to its normal range — mid teens to low 20s — going into 2019.
"Institutional investors increasingly are understanding how volatility strategies fit into their portfolios," said Paul A. Britton, founder and chief executive officer of global volatility specialist manager Capstone Investment Advisors LLC, New York, during an interview at the firm's annual global volatility conference in New York in March.
"Seven or eight years ago, institutions didn't know what to do about volatility, but now they're in the third or fourth inning when it comes to increasing their understanding of and investment in volatility strategies," said Mr. Britton, who is based in New York.
In an interview this month, Mr. Britton attributed a surge of interest and investment in Capstone's volatility and tail-risk protection strategies from U.S. corporate and public pension plans to anticipation of lower annual equity returns (5% to 7%) over the next five years and a higher level of volatility.
"That's a nasty mix," he said, noting that investors are considering tactical ways to bank recent equity gains by lowering their equity exposure and replacing some of that allocation with volatility strategies.
In fact, about $2.5 billion of Capstone's $5.8 billion of assets under management are in the firm's S&P 500 derivatives strategy.