Correlation dislocation

Hedging portfolios by buying equity volatility was the right answer to the market conditions of 2008, but the same has not been true this year as asset classes dislocate and the price of volatility rises. Joel Clark investigates

Dan Fields, SG CIB

Buying equity volatility has long been a way for dealers to macro hedge their portfolios, but the latest phase of the financial crisis has challenged the wisdom of such strategies. A dislocation between asset classes during the first half of 2010, coupled with the increasing cost of buying volatility, made certain hedges less effective than planned and has driven some firms that use macro hedging to rethink their approach.

The underlying assumption of buying volatility as a macro hedge is that