CFANY & OIC Sponsored Option Event – October 26th
In Uncertain Times, Are Exchange-listed Options a Solution for Asset Managers?
On October 26, 2017, CFA Society New York and the Options Industry Council produced an institutional investor event to address the concern about market risk and political uncertainties with markets at all-time highs. Michael McDonough, Global Director of Economic Research, Bloomberg Intelligence was the keynote, and his market commentary dovetailed into a spirited panel conversation moderated by Dominic Chu, Markets Reporter, CNBC and a panel of institutional option experts; Stacey Gilbert, Head of Derivative Strategy, Susquehanna Financial Group, Sean Heron, Portfolio Manager and Director of Risk Management Strategies, The Glenmede Trust Company, Josh Silva, Partner and Portfolio Manager, Harvest Volatility Management Michael tackled the number one question on all institutional managers mind, what could derail this unprecedented optimism, or what the markets have come to call the “Trump Rally” in the global financial markets. The obvious is the inability to get tax reform, infrastructure spending, disruption in international trade and a hawkish Fed. Bloomberg data showed that these markets are not pricing in a hawkish Fed going into 2018, highlighted by the number of Yellen Fed replacements, Kevin Warsh or John Taylor, and the lack of any reaction in the markets either positively or negatively. Michael also highlighted that this global optimism is not necessarily translating into stronger data (referring to the Bloomberg Economic Surprise Index). He also voiced concern potential labor disruption in the service sector, putting manufacturing employment in question, potentially showing a chink in the “Trump” armor. He wrapped up with a discussion about Chinese growth moderating and that the number one risk in the economic superpower in the East is a weakening personal property market, but the continued “easy monetary policy will continue to help buoy the impressive growth in the Chinese markets.” Michael wrapped up the discussion with a quick review of the state of the EU. Right now the risk is with the continued Brexit negotiations and interest rate policy changes by the ECB. The latter needs to be monitored, especially as it pertains to putting any pressure on the Euro. Dominic Chu, the Markets Reporter for CNBC, and an all-star list of panelists took on addressing challenges that a very optimistic but lowest volatility market “since Lyndon B Johnson Era.” Specifically, the panel discussed how they are dealing with the buy-side low volatility through better strategy choice. Stacey Gilbert from Susquehanna Financial Group was the first to address the reason for the low volatility in the markets, which she explicitly said was due to the positive growth and positive global storylines. She noted that there is “an incredibly low correlation for equities” (6.31) where things are not moving together, but that does not mean that stocks are not moving. We are just not seeing stocks moving together but what we are seeing is a strong rotational market, where a “tweet has players moving from healthcare to aerospace.” Josh Silva from Harvest Volatility Management, pointed out that back in 2011 when we saw the higher stock correlation, we saw very high index volatility. So when we see 2017 low sector correlation, we have experienced little index volatility. But trading volatility via product and strategy selection via online/point and click has made it so easy to create alpha, i.e., short the put, at everyone’s fingertips. Sean Heron, from The Glenmede Trust Company, addressed how to find Alpha to enhance returns strategically. He highlighted that we are indeed in the quest of alternative beta rather than Alpha, to indeed have the diversification. So outright selling volatility is not the Alpha that buy-side institutional strategy diversification but can do it with long vol approach through buying VXX, volatility ETF, vs. long The S&P 500 on a 5% to 95% ratio and rebalance on a monthly basis. Now you would have underperformed the market over the last five years by 5% but with 65% less risk. So there are similar ways to trade volatility on the long side that would achieve the goal of capital and risk diversification. While many “managers” are well versed in traditional “buy and hold” or “long-only” strategies, many do not have a solution for the inevitable correction, “left tail” risk or an unexpected political event. This panel suggested not only broad-based solutions but highlighted option-based strategies for up, down & sideways markets. Participants of this evening’s conference walked empowered with new practical ideas to help you achieve investment objectives, using listed options, in what many consider very uncertain times.