Funds Jump Into Var Swaps To Play Vol
Variance swap plays in Hong Kong and Korea are taking off as global hedge funds use the instruments to place bets on rising volatility in the region.
Variance swap plays in Hong Kong and Korea are taking off as global hedge funds use the instruments to place bets on rising volatility in the region. "The level of activity has surged in recent months," said Justin Kennedy, managing director in Asia-Pacific equity derivatives at Citigroup in Hong Kong. He notes that interest is being driven by hedge funds going long volatility, believing that levels have bottomed out (DW, 1/28). Traders said variance swaps are a relatively new instrument to the region, compared to traditional volatility plays using pure option straddles, but variance swaps are now popular instruments in the U.S. and Europe (DW, 5/2/04) and they look set to spread into Asia. An equity head at a bulge bracket house noted that in addition to outright long positions on an index in variance swap trades, end users have also been going long single shares versus shorting the index because they expect single name volatility to be higher than the index.