Berlinda Liu, director of index research at S&P Indices, explains the role, application, risks and potential for VIX products in Asia.
Date: Dec 2011
What trends are there in the take-up of VIX products globally and in Asia, and among which types of investor groups?
There are 38 ETPs linked globally to S&P VIX Futures Indexes, with assets of US$2.6 billion. Looking at derivatives, VIX futures and options have had a record year in 2011. Around US$10.6 million worth of VIX futures contracts and 86.2 million VIX options contracts were traded in the first 10 months of the year, with most users of VIX products being hedge funds, traders and other institutional investors.
Looking at Asia specifically, there seems to be strong interest to get local volatility indicators consistent with the VIX methodology. To that end, we have worked with our partners at CBOE to bring to Asian exchanges local volatility indicators such as VHSI in Hong Kong. Volatility indices in India, Taiwan and Australia are also licensed by us.
These indices are designed to measure the implied volatilities in the local market, and will potentially provide investors instruments to hedge their local holdings by trading volatilities.
What is driving these trends?
What benefits do VIX products offer?
Furthermore, the negative correlation is most significant when it is most needed, for instance during periods of market stress. Therefore, sophisticated investors use these products to hedge portfolios or manage tail risk.
What are the potential risks or pitfalls of using these products?
They are not simple buy-and-hold products, so traditional buy-low-sell-high investment wisdom may not apply.
Users of these products therefore need to understand certain unique characteristics:
What misconceptions do investors have with these products?
There are principal misconceptions:
Where are the opportunities for product development going forward?
We are looking to do far more in the Asia Pacific region by building on the launch of VIX indicators in Hong Kong, Australia and India.
In terms of product innovation, we expect to see more products that dynamically allocate between volatility and equity to provide pre-packaged investment solutions that reduce portfolio downside without giving up a lot of the upside.