May’s unexpected increase in equity market volatility, which led to big mark-to-market losses for some hedge funds, has not dented the variance swaps market, according to dealers. No volume figures on the products are available but, according to Gerry Fowler, equity derivatives strategist with Citigroup in London, it remains a burgeoning market, with investors even starting to enhance their volatility strategies by trading new variations of volatility contracts called conditional variance swaps.
“Most people weren’t discouraged by the volatility in May, and even though a lot of them lost a decent amount of money on their mark-to-market positions during that period, it gave them an opportunity to be selling at much higher levels, which means they recouped most if not all of those losses,” says Fowler.
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