Macro Vol Commentary-

Domestic equity market volatility continues to be muted with realized measures back to the lows of 2017 despite the drastic pick-up in realized volatility spreading through both Emerging Market (EM) equities and currencies. The U.S. has been rather resilient in the face of growing concern about the risk of contagion spreading into Developed Markets (DM), with a meltdown in EM not yet shifting investor psychology into risk-off mode. The slight pick-up in US implied volatility is due more to the rout that continues in tech (Tesla, FAANG) and concern over a worsening of trade tensions with China. As a result, many of the popular metrics within volatility are pointing toward bullish territory for major domestic indices (Russell 2000, Nasdaq, S&P 500) while Emerging market stress continues to permeate through both FX and Equity markets leading to potentially attractive dislocations in volatility. European equities, on the other hand, have become increasingly sensitive to EM risk, with volatility rising throughout Europe over the past few weeks as the SX5E has experienced its worst decline in almost 6-months. This could represent an apparent shift in focus from domestic issues (like Brexit & Italian risk) to more exogenous factors. We continue to watch volatility in Europe closely to see if there is any potential spill-over effect into Developed Markets on the horizon. Volatility Mutual Funds in Asia has also been driven largely by EM risks as well as fears of additional Chinese and/or Japanese tariffs more significantly impacting exports to the US. So it comes as no surprise that realized volatility has been steadily increasing amidst these concerns offering interesting opportunities within implied volatility to isolate dislocations and potentially take advantage of favorable volatility conditions.

Cross-Asset Volatility Monitor-

In the latest edition of our 20 factor Cross-Asset Volatility Monitor, many DM equity indices lead the way for most dislocated upside & downside volatility metrics when comparing to recent realized volatility. As a reminder, our proprietary model screens for Volatility Hedge Funds that may suggest larger than normal market moves in the left (downside) or right (upside) tails. Those that are near the center have, in our opinion, fairly priced implied volatility compared to the risk you are taking, using the recent (1-month) past as your guidepost. As you move further away from the center, you see the magnitude of dislocation between where current markets are pricing implied volatility as compared to what has actually recently realized. Not surprisingly, most of the FX and EM related factors (EEM, FXE, FXY, FXA) have fairly priced volatility (and for good reason), given the recent risks permeating through the system that have caused a dramatic pick-up in realized volatility and severe drawdowns, as highlighted in our Commentary. Alternatively, some DM benchmark indices like SPX, SMI, AS51 and SX5E are screening as potentially attractive short volatility opportunities given the fact that the downside volatility market is pricing in abnormally expensive tails, especially when considering realized volatility has not kept up with the magnitude of change in implieds. We will certainly continue to monitor these markets as a source of abnormally cheap or expensive convexity and to hopefully continue to identify attractive trading opportunities.

For more information on Volatility Mutual Funds, Lipper Awards ,hedge funds NYC and, volatility mutual funds, visit infinityq.com.

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