Benn Eifert, Founder and Managing Partner of QVR Advisors, dives into the complexities of today’s volatility markets with a data-driven perspective. He shares insights on the unintended consequences of crowded option strategies, notably how risk-managed ETFs may underperform traditional portfolios. Eifert discusses the vanishing volatility risk premium since 2012 and the impact of structural flows on expected returns. With an eye on evolving trading strategies, he highlights the need for adaptive risk management in these dynamic markets.
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insights INSIGHT
Buffer ETFs Cut Beta, Not Hedge
Buffer ETFs mainly reduce beta rather than providing real downside protection.
Crowded call-writing strategies have drained the volatility risk premium, causing underperformance.
insights INSIGHT
Vol Risk Premium Vanished Since 2012
Since 2012, the short-dated volatility risk premium has vanished and remains near zero.
Flow-driven steep front-end volatility term structures reflect persistent selling of short-dated volatility.
insights INSIGHT
Post-COVID Volatility and Tail Risk Dynamics
Post-COVID, tail risk selling blew up vol and skew, but the premium compressed quickly afterward.
2022 saw a market selloff without big volatility spikes due to light positioning and widespread hedging.
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The clearing price of optionality in the market is impacted by a myriad of factors. To be sure, the economy and corporate profit cycle, the stance of monetary policy and geopolitical risk all matter. Flows in the derivatives markets are also of consequence as they impact the environment for supply and demand. And in this context, it was excellent to welcome Benn Eifert, Founder and Managing Partner of QVR Advisors, back to the Alpha Exchange.
Benn brings a data-driven lens to today’s complex volatility markets, and in this conversation, he discusses the unintended consequences of crowded risk-managed option strategies, such as buffer ETFs and overwriting. We explore how structural flows have drained the volatility risk premium, especially from the front end of the curve where the flow has especially been one way, leading to substantial optionality being sold into the marketplace. Benn states that since 2012, the VRP has largely vanished, leaving the returns to owning short-dated straddles actually positive since then. For risk-managed ETFs, the implications are unfavorable as many of these strategies often reduce beta without providing meaningful downside protection, results that are posted on the QVR website. From Benn’s perspective, even for a large and liquid options complex like the S&P 500, the sheer volume of capital chasing the same trade is distorting expected returns.
We finish the conversation by exploring the evolution of QVR’s trade implementation and risk management practices. Here, Benn shares that the listed options market has become a focal point relative to years ago when OTC products transacted bi-laterally with large banks were of greater importance. The approach now leans into technology and seeking to exit and enter trades more passively, with a market-making approach.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Benn Eifert.
Alpha Exchange 