Amundi Q&A: Risks and opportunities in market volatility

Gilbert Keskin

Last summer, volatility returned to global stock markets, a trend that has continued through 2015. Gilbert Keskin, co-head of volatility and convertible bonds at asset manager Amundi, talks to Room151 about the risks and opportunities this provides for investors.

Room 151: Recently we’ve seen pretty wild swings in the valuations of companies and indices. Is equity volatility the new norm?

Gilbert Keskin: Actually, the answer is yes. It depends on what you mean by the norm, however. What was maybe not normal was the past three years’ volatility regime. Central bank action reduced significantly the risk across all asset classes. Now that is tapering off, we are seeing something back to more normal.
The volatility in the market is a new normal but it is one we have already seen in the past.

One thing that is slightly different this time is the expectations of the market, measured through the option market. Here, the expectations have changed from the past, particularly on short-term maturities. A lot of people are now using any sort of spike to increase short positioning on volatility products. The effect is to increase the speed of normalisation. Ten years ago, following a spike it took time to see a return to a more normal volatility. Now the decline in short term volatility is clearly becoming quicker.

R151: Should we all be market timers now? Is the age of buy and hold over?

GK: It is not really over – the equity market is still an interesting one if you have the long term in view. But you have to be careful in terms of allocation and sector. You have to be more and more dynamic than you would have been 20 years ago.

R151: Taking the example of Glencore. Clearly they have their challenges but does a one year range of 66.67 – 339.00 and huge swings in between, speak to a hyper sensitive market?

GK: I would say this specific story is nothing new – we had these kinds of volatility in the past. There is nothing particularly unusual about it.

R151: Why is volatility trading – arguably focused on the short term – a relevant tool for a long term investor?

GK: You have different ways of investing in volatility. Some long term investors are able to invest in volatility by themselves and there are a lot of instruments that can be used. You can also use funds where you have a dynamic allocation to the volatlity of equity markets. The idea is to provide medium to long term positive return – or absolute return –  by taking  contrarian positions. It is not the magic product buying low and selling high for a big return, but it does provide the advantage that usually this process provides good returns when there is a changing volatility regime.

R151: What should a good volatility trader deliver, above all? 

GK: If a long term investor wants to use volatility then you have to have an active volatility manager in order to deliver positive performance. If you use passive management it can lose money due to time decay, cost of carry and replication costs in general. If you use it just as a hedge it is different – you need to have good timing. The most reactive are the short term volatilities – those which protect the most – but are also the most expensive. If you hold short term vol in a portfolio you can lose a lot of money due to high time decay when the volatility level remains low.

It also depends on the product used. You have to monitor your portfolio regularly. You have to know well how it is built  and how it will behave in different circumstances. For example, some ETFs claim to offer protection without costs – in my opinion that doesn’t exist, as at some point you will bear some risk.

R151: Do vol traders concentrate on a basket of stocks or certain themes or are they looking across the market for volatility?

GK: It is true that over the past three or four years – single stocks have become less popular – more and more investors are going into index volatility. The reason is the liquidity, which is increasingly seen as a key factor, and which is higher in case of indices. In terms of the indices – more and more players are using short term futures.

R151: Do you go short and long? How do you operate?

GK: We have two kind of strategies – one we call arbitrage – long and short – no specific direction is taken on volatility. The other process is directional volatility, which takes a real bias over either long or short.

Each approach is clearly for a different type of client – the directional is more for clients looking for diversification and protection when volatility is moving a lot. This is more a hedge provider, but during 2008 to 2011 this delivered some double digit returns. The arbitrage strategy is more about providing an absolute return for clients, who wish to enhance their cash position. It is decorrelated from other strategies.

R151: Do you have a view of what 2016 has in store for us?

GK: We are not expecting a shift into an extremely high regime of volatility – we are expecting it to stay medium to low. However, there may be some spikes. We saw one this summer and last October and at the beginning of the year. There shouldn’t be extreme spikes. In this kind of environment, being extremely active is becoming crucial to performance.

Photo (cropped): Iman Mosaad, Flickr.