A volatile commodity

The protracted fall in implied volatility levels has had an interesting effect on the products and strategies used by hedge funds.

Implied volatilities exploded to multi-year highs during the crisis in 2008, but the aftermath has caught almost everyone by surprise. Since hitting a peak of 89.53% in late 2008, the Vix, an index traded on the Chicago Board Options Exchange that reflects investor estimates of future volatility, has traded down to around 20%.

“Very few players have been able to foresee the crash in implied volatilities since the peak of the crisis,” said a senior trader at a large volatility-based hedge fund in Asia. “In particular, the shorter dated tenures have seen a huge capitulation.”

Volatility funds generally outperform in jittery markets the flagship volatility...

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