On June 23, 2021, Optiver Insights hosted its latest webinar on the subject of global volatility. Our virtual event brought together hundreds of international financial players, including leading portfolio managers, hedge funds and trading exchanges. Optiver’s own senior traders were joined by special guests El Mehdi Benhmade Senior Portfolio Manager at Eisler Capital (London) and Danny Scinto, CFA, Partner at BFAM Partners (Hong Kong) Limited.
Attendees were left with much to consider as we look ahead to the second half of 2021. Could we be witnessing a regime change in asset correlations and market volatility? Are equity put options now the best way to hedge a traditional portfolio, with bonds no longer providing the necessary protection or diversification? Read on to deep-dive all the fascinating discussion points from this week’s webinar.
New volatility cycle?
Contributing to the sense of regime change is a shift in volatility dynamics. A lack of systematic vol sellers on the downside means the strong demand for equity hedges is encountering a lack of supply.
The “ecosystem in vol” has changed, according to El Mehdi Benhmade. “I think the risk premia sellers have disappeared, and we have a survivorship bias at this point where whoever survived has had a long vol bias historically. If you look at who is still trading, it’s going to be long vol guys rather than short.”
Danny Scinto said he believed markets were embarking on a new cycle of low volatility. The markets are watching closely to see if the Federal Reserve will tighten policy in response to fears of nascent inflation. “The Fed is really dampening volatility: it’s a Goldilocks situation – Fed policy isn’t going to be too tight or too loose.”
“The market is fragile”
The Vix volatility index, which currently trades around the 100-year average of 15, is set to rise, participants predicted. A poll at the webinar showed 39% foresaw the Vix averaging 21-25 in the second half of 2021, with 37% expecting an average in the 16-20 range.
The shifts in equity-bond correlations and the volatility trading ecosystem, together with inflation nerves is making for a fragile market where investor crowding is also evident, speakers said.
“The market is fragile, and one of the main reasons for that is inflation. Clearly that’s the big theme,” said Neil Patel, Optiver US Senior Trader. The emergence of retail traders as a dominant force in US single stocks is also having a significant effect on the market, he added.
“This big increase in retail flow, in combination with some instances of overleveraged family offices, has led to some deleveraging of specific funds and that has spilled over into the broader US market. Everyone is waiting to see how the regulatory environment will change,” said Patel.
“The two themes of inflation and retail flow may seem unrelated, yet together they symbolize the fragility of the market, even with the S&P 500 at all-time highs.”
Inflation or deflation?
In the discussion of prices, Sumit Kendurkar, Senior Options Trader in Optiver Europe, took what he admitted was a controversial view: that structural forces are deflationary rather than inflationary .
“Everyone is talking about CPI and inflation prints, but in my view, supply chain constraints are not permanent. What are permanent are structural deflationary forces. Technology, working from home, globalization, ageing demographics – all these are deflationary. I’d say the downside risk to equities is a lack of inflation, not inflation itself.”