Equity volatility backlash

Taking a long equity volatility position is a favourite macro hedge for risk managers and traders across asset classes, but the trade doesn’t always work as expected. How has the volatility experienced in May and June affected macro hedging? Joel Clark reports

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