To say the markets over the last 12 months have endured periods of heightened volatility would be an understatement. Buysiders, as a result, sharpened their awareness and upped capital allocation to volatility products, whether through exchange-traded notes, exchange-traded funds, or bespoke indices linked to the VIX. Those buyers, including asset managers and pension funds, tagged Nomura as ahead of the competition for its innovation in volatility themed strategies, indices, funds and products. That helped the firm land the 2012 Volatility House of the Year award from the editors of Derivatives Week/Derivatives Intelligence.
Buysiders note that the firm has been at the forefront of the structured volatility market in recent years in terms of investor interaction and education. And that has stepped up globally after Nomura partnered with Nikkei in the creation of the Nikkei volatility index, the first volatility index launched in Japan.
One innovative product highlighted by buysiders is the Nomura Voltage Mid-Term Source ETF. The UCITS III ETF launched in April 2011 and tracks the Nomura Voltage Mid-Term index that gives exposure to VIX futures. It wraps a strategy that aims to capture spikes in volatility while minimizing slide costs.
The ETF is recognized as the first volatility-linked ETF that reduces incurred slide costs that are associated with systematically long volatility positions. The firm does this by determining its allocation to volatility through so-called volatility to volatility, which measures the magnitude of changes in price of VIX futures.
The problem with being 100% allocated to volatility is the negative carry, which can have a dramatic impact on performance. So, coming up with an ETF that takes a tactical approach to allocation to volatility helps investors to reduce slide costs while capturing that sought-after volatility spike, said Yangui. Clients have been looking at volatility as an asset class for a while. In terms of traction in Europe, it is only recently they have invested in size in long volatility products. Thats because we have introduced new alternatives that provide the volatility spike they are looking for, whilst reducing the slide costs occurring during periods of market calm.
In January, the ETF grew two fold to more than USD160 million on the back of increased inflows from institutional investors and over the last six months reached a peak of USD600 million during periods of high volatility. It currently sits at USD275 million, and has attracted investments from pension funds, asset managers, private banks and insurance companies.
A number of buysiders highlighted that minimizing incurred slide costs was a key feature as to why they invested in the ETF. Buysiders also highlighted the low counterparty risk as another favorable component of the ETF, since it is UCITS III compliant and listed on the London Stock Exchange.We have been looking for a product in volatility where we want to be long volatility like a tail hedge against equity market turbulence, but normally the carry is a killer in the market, said a senior official at a Finnish pension fund. Most of the other products have suffered quite badly when volatility is stable or is coming down.