"One Of The Biggest Fears I Have Is I Miss It": There Is A Sudden Rush To Open Long-Vol Funds

Tyler Durden's picture

Last month, Soc Gen analyst, Praveen Singh, analyzed evolving cross-asset volatility trends, and boldly went where so many have unsuccessfully gone before. Singh’s warning was that the market is "now entering dangerous volatility regimes."

The crux of Soc Gen’s argument was mean reversion, notably that the current low level of volatility happens less than 2% of the time for equities. Furthermore, Soc Gen found that when equity volatility has been this low in the past, it went on to rise by 3 points in the subsequent 12 months. This means that volatility is more likely to go up than fall further from current levels... at least in theory.

Portfolio managers, however, are increasingly thinking along the same lines. While it’s rumoured that Brevan Howard will shortly launch a long volatility fund, according to a Bloomberg it appears that there is a surge of interest in launching long volatility funds.

According to Bloomberg Brevan Howard Asset Management, 36 South Capital Advisors, One River Asset Management and at least three other firms are rolling out new funds designed to protect investors from rising market turbulence.” Former SAC Capital’s, Hamming Rao, opened a volatility fund with a long bias this June, based in Florida.

While buying volatility has been a widowmaker trade in recent years, the fund managers Bloomberg spoken to by Bloomberg couldn’t be more optimistic: Jerry Haworth, the co-founder of 36 South who “tripled investor’s money” during the GFC, launched the Lesidi Fund earlier this month. Haworth commented “This is a multi-decade opportunity to buy volatility’…To increase the appeal of his long-volatility strategy, Haworth focuses on reducing the ‘negative carry,’ or steady bleed of cash, that accompanies calm markets. That’s gotten easier these days as prices for options and other volatility-linked derivatives have fallen.”

In a similar vein, Michael Preiss, a portfolio strategist at $1.9bn Singapore-based Taurus Wealth Advisers argued “The most mispriced asset class in the world is volatility…a bunch of our clients are in discussions with us at the moment about whether to add volatility strategies.”

“The opportunity is right now. One of the biggest fears I have is I miss it.” according to Arun Singhal of Astrid Hill. Singhal expects to launch a  volatility fund before year-end with an initial target size between $50 million and $100 million.

The conundrum for investors was perfectly explained a few days ago by the new Nobel laureate in economics, Richard Thaler “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.” Of course, we can point to all manner of risks which could have major knock-on effects in financial markets, North Korea, Brexit, Peshmerga, several major European banks, China’s credit bubble, etc.

However, since central bank policies are the major reason for our low volatility world, the fact that monetary accommodation is now being (slowly) withdrawn - with ECB expected to join shortly - means that there is finally some prospect for a “regime change” in financial markets. After all, the bubble merchants have generally been raising rates at the onset of recessions in the past.

Of course, it would require a change in regime that overwhelms the central banks’ ability to unload a few thousand VIX contracts at “just the right time” and a vast number of HFTs and algos which are doing very nicely in the current BTFD environment.

Meanwhile, talking of mean reversions, there is another factor which makes the current timing slightly more attractive than it has been (ever actually).

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Yen Cross's picture

 I suggest that you join the club while it's still affordable.

Dr. Engali's picture

Maybe if these fools would stop trying to think of things to sell they’d come to understand that markets are a thing of the past. Welcome to the brave new world.

Cognitive Dissonance's picture

We're not in Kansas anymore Toto Dr. Engali

Dead Canary's picture

I predict the markets will level off and stabilize for several years.

( ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha, ha,ha!)

Pernicious Gold Phallusy's picture

Interest rates, too, will be reverting to the mean, any day now. Don't miss out!

OpenThePodBayDoorHAL's picture

Dude's gonna get crushed, VIX will go to 3, 2, 1...then event horizon as it disappears entirely. How can there be risk in the Great New World of CB equity participation notes, oops I mean bank currencies

luckylogger's picture
Realised vol  has been 5% for the S&p lately....

Current vix is 9+, how is that underprised?

liberty777's picture

The aggregate market value of stocks of the whole world is approximately 80 trillion dollars.

It is very stupid to think that FED and ECB, BOJ can buy this up.


garypaul's picture

Fleckenstein, is that you?

What part of "total leveraged liquidity by the central banks is 100 trillion dollars" don't you understand?

ONE HUNDRED TREEEELLION DOLLARS!!

OpenThePodBayDoorHAL's picture

LOL maybe you can 'splain to me why the 10-yr JGB, formerly one of the most important of all financial instruments, is now bidless for the last 72 hours...except of course by the entity that issues them. Circular much? And the bond mkt is 10X the size of the measly stock market

Irvingm's picture

Oh but don't virat the bubble of the thousands of readers of ZH

The Duke of New York A No.1's picture

FED proxies will continue to sell VIX to keep the sheep at the casino tables - until the FED has unwound their balance ... the FED can't unwind it's balance sheet with huge swings of vol in the markets... markets can't be tanking inorder for the FED to pull liquidity in a ordely manner.

OpenThePodBayDoorHAL's picture

Fed can't unwind, they will tighten by lowering IOER

Ouagadoudou's picture

If u can hold ur position for a while it's certainly a good trade. But don't wait for a trend upward. Just sell at 20. Rince, repeat

Dr. Mantis Toboggan's picture

You can either burn your own money by way of paying theta, OR you can convince people to give you their money to burn on essentially buy lottery tickets timing the turnl for fees of 2% admin and 20% of profits. Fucking brilliant.

Yen Cross's picture

   I've got a few spare jugs of "Round Up" under my porch. 

 That's what I told the gals over at 'Seeking Alpha'

 They were so wouund up in Beta/Alpha. Beta isn't bad, with some gamma.

 Ohh-well.?

Irvingm's picture

The fact is a lot of traders on ZH have been bearish since the Dow was 9k and are broke. There is a crash coming but those perma Bears are out anyway.

 

Stick with the proven track record of the one or two good market analysts left SHEPWAVE

ZeroBeek's picture

ZH please can you stop this commercial advertiser? 

wonger's picture

If anyone thinks the dow cant drop 5000 points in a single day then i suggest you stop watching for a few weeks!