The volatility is not only a cause for anxiety

The volatility is not only a cause for anxiety. It can also be a source of profit. It is especially the case for managers, which is precisely to take advantage of the ambient nervousness and agitation of the markets to make money. Mirror of fears, volatility measurement dispersion of returns, price, etc. around a medium. It is an indicator of the fears and concerns of investors when uncertainty increases and the horizon darkens.

The end of the second world war to the LTCM crisis in September 1998, monthly volatility annualized French stock market has evolved around 20 with a few rare peaks, such as the October 1987 crash (see below). At the edge of the years 2000, the dot-com bubble brought the market in a new dimension that contrasts with the past (see box).

"After having greatly increased in 2001 and 2002, implied volatility (see Glossary) is is normalized the following years to not really go up until the summer 2007" "Maintaining an extremely high implied volatility about 50 on deadlines close since September is the sign that the market considers plausible a systemic crash or economic depression," says Laurent Roussel, Deputy Director of research for Exane Derivatives. "At a level between 60 and 65, we remain, today, well below the records on historical volatility observed in the crashes of 1929 (105) or October 1987 (100)" ", said it still.

The stock market volatility has a particularly interesting property in the current context. In General, it increases when scholarships fall because markets are generally faster falling that they ride and more disorderly manner.

Multiple techniques

"In periods of strong financial turbulence, stock falls will generally hand in hand with an increase in credit spreads ("spreads"), explains Brice Périn, managing volatility French investments." "Long flight" funds, structurally buyers of volatility, provide protection for stock portfolios but also down for credit portfolios (obligations of companies, etc.) and alternative portfolios, the phases of rise in volatility is usually not very favourable to "hedge funds".

These products of diversification and coverage are "destined to investors who cannot resort directly to the products and therefore use these funds as"shock absorbers"to protect their portfolio", adds Patrice Ribault, the CPR Volatility Fund Manager. On the first nine months of the year, funds "long flight" display performance between 0 and 15. A dispersion which can be explained by the diversity of techniques and methods used by each Manager (read below).

Objectives of outperformance

The other major category of products on the volatility is constituted by funds of arbitration. Older, more and more flexible funds "long flight", they may be buyers or net sellers of options. These are funds of absolute performance that displayed targets of outperformance relative to Eonia and Euribor rates. A number of these products "have been created on the initiative of former arbitragistes managers of convertible bonds, which were partially or totally abandoned these products in 2005, when the conditions were less favourable", said Hatem Dohni, responsible of the volatility pole and convertible CCR management (Group UBS). "Moreover, lower volatility since mid-2002 and its maintenance at a lower level until the spring of 2006 have helped"long flight"funds to emerge given level historically little expensive implied volatilities", he complements.

A chaotic phase

Since a few months, the market entered a chaotic phase which disorients the volatility forecasting models. "Highly dependent on the historical past, these models are of limited utility," said Patrice Ribault. ". The usual phenomena such as the return to the average no longer work and the aberrations or abnormalities may persist a while.

But "options and volatility products markets still contain a large number of inefficiencies and possible arbitration", said Olivier Cornuot, responsible for the management of absolute performance in Lyxor AM. "In view of the risks of these products, to intervene, players must have a computer system for control of the risks, administrative and accounting management important and sophisticated." "It creates as many of the barriers to entry for asset managers and explains the maintenance of these inefficiencies," he added.

With the good funds of volatility with the other asset classes, including actions, new institutions should embark on this niche. But cautiously, because with these complex instruments, lack of vigilance and rigour can afford very expensive, as shown by a recent "incident".