Wednesday, June 1, 2011

FT: "The Calm Before the Volatility Storm" (VIX)

"The chase for yield has made selling volatility a popular trade, and this has been a factor in low implied and realized vols. At the same time, growing macro (crossasset) portfolios likely contributed to the rise of cross-asset correlations. Hence, an extremely accommodative monetary policy may have simultaneously resulted in low volatility and high cross-asset correlations."

4 comments:

Taylor Conant said...

Interesting thesis and makes sense but I also don't like the implicit meme:

"Hedge funds are primarily responsible for crises in the financial markets; hedge funds are 'unregulated'; therefore, hedge funds should be regulated to prevent crises in the financial markets."

The FT is a mainstream, statist mouthpiece. This "burn the hedge funds" (akin to "burn the shorts") mantra has been trotted out in every big crisis since LTCM. The lesson we're all supposed to be learning is that if it weren't for those damn unregulated hedge funds, everything would be fine.

It's again hilarious to note that the author mentions hedge fund leverage but fails to mention where leverage comes from (banks and central banks), and how that leverage is also correlated like all of these other trades.

Has there ever been a major financial market event/crisis that was not preceded by an enormous growth in credit and leverage, explicitly or implicitly?

getyourselfconnected said...

Banner day for thr banking sector today (XLF), made me smile.

CP said...

Nice - the squid got pounded!!

You may be right about the politics of the FT but miss the point of the article.

There are too many people whose diversification is illusory. They own NFLX AND APPLE AND LNKD.

They are going to get a telephone pole in the wrong place if they have to sell their correlated positions.

Taylor Conant said...

I wouldn't say I missed the point of the article-- I got that bit.

I was adding my own observation to the mix.