Pension and insurance fund managers are increasingly venturing into trading equity volatility as an asset class in its own right. Variance swaps, once a volatility play reserved for hedge fund managers, are now fairly liquid, which has upped their popularity with institutional clients (DW, 1/28). This year has also seen the development of volatility indices such as VSTOXX in Europe (DW, 8/5) and fund managers now have access to derivatives of these indices.
Volatility trading is gaining favor with institutional clients because there is a growing interest in protecting equity gains, explained one dealer. Implied volatility, which is the payout of a variance swap, is inversely correlated with equity and so can be used as a form of equity gap risk protection. Rick Lacaille, chief investment officer for Europe at State Street Global Advisors in London, agreed. "People are getting more interested in downside protection," he noted. Over-the-counter equity index and single stock puts are also gaining popularity as a way of protecting a portfolio.
A handful of asset managers, including AXA Investment Managers, Morley Fund Management (DW, 2/25) and Schroder Investment Management (DW, 4/1) are also selling equity derivatives through volatility-based structured investments aimed at main street clients. "This is a growth business for us," said Lacaille. Rolling out strategies State Street has used on a bespoke basis for institutional clients to target retail clients is a natural extension of its business, he added.
