Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Volatility horses for multi-asset courses

Volatility is an asset class in its own right, and multi-asset portfolios can benefit from both long and short volatility exposure.

In the context of managing investments, the term 'volatility' is commonly used to refer to standard deviation, a measure of the range of realised returns for an asset or portfolio. But we also regularly use it to refer to the expected volatility of an asset implied by the price of derivative contracts on that asset, and this type of volatility can actually be bought and sold much like any other asset class.

Long volatility positions are defensive in nature and can be used for downside protection, whereas short positions aim to capture the (usually) positive spread between implied and realised volatility sometimes referred to as the 'volatility risk premium'. Both have their uses; it is very much a case of 'horses for courses'.

I recently took part in a panel discussion at the Cboe Risk Management Conference in Munich, an annual get-together of investment professionals who are in some way involved in buying or selling implied volatility. The title of the session was 'Equity Volatility in Multi-Asset Portfolios: Past, Present and Future', and we discussed the role that volatility as an asset class can play in portfolios of all shapes and sizes.  

In future posts I'll write about how our team uses volatility as a diversifying asset class in some of our portfolios, but for now I'll leave you with the clip below that shows me attempting to cram the hour-long discussion into a four-minute summary, with a camera shot that is sometimes a little too close for comfort!  

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