Investing in volatility is not a trend: Triple 3
Investing in volatility as an asset class is not a passing fad or trend, said Triple 3 Partners director, Simon Ho at van Eyk's annual conference in Sydney last week.
Ho said investing in volatility options is a "revolutionary approach to investing" that could "add an entirely new dimension to a portfolio".
He said investors can access volatility through options and the inverse relationship between volatility and other asset classes means that if the stock market turns, the investor always has access to funds.
"Whilst the mantra of diversification is still a good idea, it is a blunt instrument," he said, and referred to the fallout in 2008 following the global financial crisis as evidence of the philosophy's shortcomings.
Volatility index (VIX) options are now established as "one of the biggest, most liquid index contracts in the world with daily contracts of over one million not uncommon," he said.
Ho said volatility was a good way to manage risk, and because it grew in times of uncertainty, volatility could provide liquidity and greater profits than other asset classes.
Unlike stocks, the VIX eventually returns to the mean so prices of options tracked to the VIX would always get better, "no matter how bad it gets," Ho said.
The inverse relationship between VIX options and other asset classes means that volatility assets are always negatively correlated to other asset classes, he added.
"Options are a tool that can add an entirely new dimension to your portfolio that simply isn't available to you by using other assets," he said.
"You have the flexibility to create structures that make money in bullish markets, sideways markets and bearish markets," Ho said.
He said volatility is routinely used as a scapegoat for poor performance, but should be viewed as a "friend" to investors.
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