Volatility is no longer just a short-term trading event but an increasingly important standalone asset class, according to one global fund manager, who believes investors are entering a new regime of structurally higher market uncertainty.
With markets under sustained pressure – including the VIX nearing 30 in mid-March and traditional diversifiers like gold failing to deliver – volatility has re-emerged as one of the most pressing topics for investors.
“We want people to be able to invest in volatilities like they invest in equities and bonds. We want volatility to be its own asset,” Philippe Imhoff, portfolio manager at Amundi Japan and head of convexity solutions Asia, told Investor Daily.
“Volatility is a unique asset… it brings a lot of diversification and an asymmetric profile… it’s performing especially well when other assets are under pressure.”
Imhoff said markets are unlikely to return to the subdued conditions seen before the COVID-19 pandemic, arguing that shifting geopolitical alliances, supply chain disruptions and persistent inflation pressures have fundamentally altered the investment landscape and increased the range of potential outcomes investors must now consider.
“We think that the volatility might change regime… from a low, medium-low regime to a medium regime because the world is more fragmented, there is a competing power shift in alliance and geopolitics, so we think that the volatility in the market stays structurally supported at the moment,” he told Investor Daily.
“We don’t expect the volatility to go to a very high level, like Black Swan, GFC or COVID… but it’s also unrealistic to think that the volatility will go to a muted level, like before COVID.”
Rising geopolitical tensions, including ongoing instability in the Middle East and uncertainty surrounding Japan’s shift away from ultra-loose monetary policy, are additional sources of volatility that could spill across global markets over the next 12 months, he said.
“One of the bigger concerns is a supply line shock. With the Iran war not being solved, for the moment people are using reserves on oil, but how long can that last? Because there is more geopolitical uncertainty, it should create more volatility.
“Japan has been the most volatile country among the countries we trade… much more volatile than Europe and S&P. Japan would be a source of volatility on its own, and then it will spread to other countries and have an effect on the US.”
Imhoff also pointed to upcoming elections in France and the US midterms as additional potential sources of political volatility.
He said investors have become increasingly complacent after years of strong equity market performance, largely driven by mega-cap technology stocks and enthusiasm around artificial intelligence, which he believes has masked deeper vulnerabilities across private credit, inflation and global growth.
Against that backdrop, investor interest in volatility strategies is growing as institutional and wealth investors seek alternative sources of portfolio protection capable of performing during periods of market dislocation and heightened uncertainty.
“Gold has been a fantastic instrument, but even if it’s diversifying the portfolio, it doesn’t work all the time.
Three years ago, in 2022, equities went down, but at the same time bonds were down – even bonds don’t hedge equities here.”
“The idea is not to say ‘don’t do gold, don’t do bonds’ … The idea is to add volatility in the portfolio next to those strategies, because it’s going to diversify the portfolio most of the time.”
Imhoff argued central banks may now have less capacity to support markets during future downturns, with inflationary pressures potentially limiting their ability to aggressively cut interest rates in the way investors have become accustomed to over the past decade.
At the same time, traditional diversification strategies may prove less reliable during periods of market stress, he said, pointing to recent episodes where both equities and bonds sold off simultaneously, while gold has increasingly traded like a “risk-on” asset rather than a defensive hedge.
“When other assets are under pressure, volatility is fine… it’s going to go the other way of the other assets in general,” he said.
“If the market is very quiet, actively managed volatility is going to be like a low-cost insurance – but when there is a sell-off in the market, like a black swan or even a small, sudden move, in that case the volatility is going to perform and it’s going to even bring some upside potential.”
According to Imhoff, concerns around the sustainability of the AI investment boom are also increasingly on investors’ minds, particularly as questions emerge over how quickly companies will be able to monetise the enormous capital expenditure flowing into the sector.
“If the growth weakens, if the AI investment cycle suddenly stops, if they discover that they cannot monetise that quickly, I think the market could retreat.
“I think there are a lot of expectations [around AI]… if all the capex that’s been deployed for some reason stops, or if there are new players coming with cheaper solutions… it should have an impact.”
Imhoff oversees Amundi’s volatility strategies, including AF Volatility World. While global equities sold off, the AF Volatility World fund returned 4.5 per cent year-to-date (net, in USD), compared with a 2 per cent decline for the MSCI World, delivering the negative correlation the strategy is designed to provide.
Over a one-year horizon, the fund returned 13.7 per cent against a 0.4 per cent decline for the MSCI World, outperforming the cash index by more than 8 percentage points.
“VIX is a one-month volatility, and what we offer to investors is a one-year volatility. We provide the reactivity of the VIX, but at lower cost,” he said.
“We’ve built a product that, over the long term, is going to improve the risk-adjusted return… in a quiet market, performance will be lower – because it’s a protection you don’t use – but when markets are more volatile, the performance will be better. It’s going to bring some convexity.”
