Market Volatility at historic lows

The VIX index (the implied market estimate of future volatility) on May 8th closed below 10 for only the 11th time in its history. And it’s not just equities, this phenomenon is happening across most assets. We have seen this movie before and with volatility being one of the true mean-reverting instruments in finance, it is just a matter of time before we will see higher vol.

The two graphs below show the VIX as a measure of equity market volatility as well as FX and Rates vols.

It’s at times like these that ‘too good to be true’ track records pop up, like this Nomura Equity Volatility Risk Premium Fund which achieved a 3.6 Sharpe ratio since the start of last year by capturing the difference between realized and implied vol in the S&P 500, that is, it sells options and if realized vol is below the implied vol it sells them for, it makes money. As investors that have been around know, tyically these things don’t end well.

As said, periods of extremely low volatility never persist and we expect our managers to outperform when the environment changes.