Cboe Global Markets, Inc. · CBOE:CBOE
Cboe Global Markets — Artemis Capital Management — CBOE Risk Management Conference Asia 2015
45 slides from Cboe Global Markets's conference presentation, Dec 1, 2015
Slide 1: Volatility and the Prisoner's Dilemma
VOLATILITY AND THE PRISONER’S DILEMMA CONFIDENTIAL For Investment Professional Use. Not for Distribution CBOE Risk Management Conference Asia Artemis Capital Management LP Christopher Cole, CFA December 1, 2015 98 San Jacinto, Suite 370 Austin, TX 78701 Phone (512) 467-4735 [email protected] www.ar
Slide 2: Volatility is an Instrument of Truth
Confidential Volatility is an Instrument of Truth CBOE RMC ASIA Regardless of how it is measured volatility reflects the difference between the world as we imagine it to be and the world that actually exist Not for Distribution CONFIDENTIAL 2 Illustration by Brendan Wiuff based on concept by Christo
Slide 3: Quotes on conflict and cooperation
Confidential CBOE RMC ASIA “The only thing “Peace is not the that will redeem absence of mankind is conflict” cooperation” Dorothy Bertrand Russell Thompson Not for Distribution CONFIDENTIAL 3 “Allegory of the Prisoner’s Dilemma” by Andy Diaz Hope & Laurel Roth. Reproduced with permission of artists
Slide 4: Volatility and the Allegory of the Prisoner's Dilemma
Confidential Volatility and the Allegory of the Prisoner’s Dilemma CBOE RMC ASIA Investors are trapped in a Prisoner’s Dilemma Global central banking “arms race” to fight deflation has trapped investors in an equilibrium of excessive risk, debt, and false prosperity Volatility is the only real asset
Slide 5: Regime Shift in the Prisoner's Dilemma
Confidential Volatility Regime Shift in the Prisoner’s Dilemma CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 5
Slide 6: Volatility at World's End Deflation
Confidential Volatility at World’s End Deflation CBOE RMC ASIA Imagine the world economy as an armada of ships passing through a narrow and dangerous strait between the waterfall of deflation and hellfire of inflation Our resolution to avoid one fate may damn us to the other Not for Distribution CON
Slide 7: Volatility in World's End Deflation
Confidential Volatility in World’s End Deflation CBOE RMC ASIA Volatility shocks are rightfully associated with deflationary crashes Volatility at World's End Deflation 120 Dow Jones Industrial Index (RHS) vs. 1-month Realized Volatility of DJIA (LHS) 50,000 100 80 DJIA (logarithmic scale) Realized
Slide 8: Volatility in Hellfire of Inflation
Confidential Volatility in Hellfire of Inflation CBOE RMC ASIA Extreme volatility can also occur in hyperinflation 120 100,000,000 Performance of German Stock Market Performance adj. for fixed exchange 10,000,000 Performance in paper marks (mil) 100 during Weimar Republic Hyperinflaton 1,000,000 100
Slide 9: Volatility in the Prisoner's Dilemma
Confidential Volatility in the Prisoner’s Dilemma CBOE RMC ASIA two purely rational entities may not cooperate, even if it is in their best interests to do so Global central banks are in an arms race of devaluation resulting in suboptimal outcomes for all parties and greater systemic risk COOPERATIO
Slide 10: Volatility and Asset Prices in the Prisoner's Dilemma
Confidential Volatility and Asset Prices in the Prisoner’s Dilemma CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Global Financial Data 10
Slide 11: Volatility in the Prisoner's Dilemma
Confidential Volatility in the Prisoner’s Dilemma CBOE RMC ASIA Exchanges short term equilibrium for longer term tail risk Suppress Tail Risk Suppress Tail Risk Increase Peak of the Distribution Not for Distribution CONFIDENTIAL Deflation Inflation War Currency Devaluation Political Revolution Hyper
Slide 12: Volatility and Asset Prices in the Prisoner's Dilemma
Confidential Volatility and Asset Prices in the Prisoner’s Dilemma CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Global Financial Data 12
Slide 13: Short Interest in Volatility ETPs
Confidential Only two types of institutions in this world, those that are short CBOE RMC ASIA Short Interest in Volatility ETPs has exploded in the 2012-2014 period convexity, and those that are massively short convexity Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomb
Slide 14: Active Volatility Management
Confidential Active Volatility Management CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: CBOE Eurekahedge 14
Slide 15: Active Long Volatility + Equity Index Exposure Outperforms
Confidential Active Long Volatility + Equity Index Exposure Significantly Outperforms CBOE RMC ASIA the S&P 500 index and Major Hedge Fund Indices Not for Distribution CONFIDENTIAL Source: CBOE Eurekahedge 15
Slide 16: Long Volatility+ by Holding Period
Confidential Volatility by Holding Period CBOE RMC ASIA Long Volatility+ Volatility Gamma Short Volatility Risk Premia Volatility Short Volatility + Vega Not for Distribution CONFIDENTIAL Source: CBOE Eurekahedge 16
Slide 17: We are all volatility traders
Confidential We are all volatility traders CBOE RMC ASIA Most active management strategies produce alpha by being short volatility or correlation Relationship between Hedge Funds and Short Volatility 3 year Rolling Correlation HRFX Hedge Composite to S&P 500 Short Put (HFRX Absolute Return, Equity N
Slide 18: Volatility is the Only Real Asset Class
Confidential Volatility is the Only Real Asset Class CBOE RMC ASIA In the real world… there are two asset classes… long and short volatility What you think you are What you actually are investing in 0.4% 0.4% 0.4% 0.4% investing in 5.0% 3% 5.0% 20.0% 10.0% 3.0% 5.0% 15.0% 3.0% 5.0% 5.0% 10.0% 5.0% 9
Slide 19: Anti-correlation is the Only Real Asset Class
Confidential Volatility is the Only Real Asset Class CBOE RMC ASIA Changing Correlations Between Fixed Income and Equity Prices Correlation Anti-correlation Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Global Financial Data, Robert Schiller 19
Slide 20: Volatility is the Only Real Asset Class
Confidential Volatility is the Only Real Asset Class CBOE RMC ASIA Changing Correlations Between Fixed Income and Equity Prices Danger Zone Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Global Financial Data 20
Slide 21: The Next Volatility Regime
Confidential The Next Volatility Regime CBOE RMC ASIA Three Possible Macro-VIX regimes for the next decade I. Bull Market in Fear (2009 to 2012) Post-2008 vol environment of steep term-structure High Implied Correlations and Forward Volatility Low to II. Bear Market in Fear = Japanization of U
Slide 22: Fear Regimes Explained by Portfolio Theory
Confidential Fear Regimes Explained by Portfolio Theory CBOE RMC ASIA Volatility Yields Should Rise (fall) when Real Interest Rates are negative (positive) Diversification benefits of volatility become more valuable than extra yield (negative real) earned on fixed income 12.00% Volatility as a Portf
Slide 23: Volatility and Fixed Income Yield vs. Risk Suppression
Confidential CBOE RMC ASIA Prisoner’s Dilemma Volatility andFixed Yield vs. Risk Suppression Income Not for Distribution CONFIDENTIAL Source: Artemis Capital Mgmt LP, FRED, MarketDataExpress 23
Slide 24: Bull Market in Fear and Modern Portfolio Theory
Confidential Bull Market in Fear and Modern Portfolio Theory CBOE RMC ASIA Bull Market in Fear is Explained by Markowitz Portfolio Theory Long volatility exposure extremely valuable to portfolio optimization in financial repression despite substantial negative carry because it hedges forced over-a
Slide 25: Volatility and Fixed Income Yield vs. Risk Suppression
Confidential CBOE RMC ASIA Prisoner’s Dilemma Volatility andFixed Yield vs. Risk Suppression Income Not for Distribution CONFIDENTIAL Source: Artemis Capital Mgmt LP, FRED, MarketDataExpress 25
Slide 26: Understanding VIX options
Confidential Understanding VIX options CBOE RMC ASIA Dimensions of VIX optionality VOV Term Structure (z-axis) & VIX Skew (x-axis) VIX Volatility Surface 160% 140% Vol of Vol 120% 100% 80% 60% 40% -1.0σ 0.5σ 2.0σ Jul-13 Moneyness (Sigma) 3.5σ Jun-13 May-13 Apr-13 Not for Distribution CONFIDENTIAL Ma
Slide 27: What Effects the Price of Volatility?
Confidential What Effects the Price of Volatility? CBOE RMC ASIA Structural imbalances in supply-demand dynamics of volatility Theme Bull Market In Fear Bear Market In Fear Post-traumatic Euphoria, I. Emotional Deflation Disorder Complacency, Greed Forced participation Low risk premiums II.
Slide 28: Bull and Bear Markets in Fear
Confidential Bull and Bear Markets in Fear CBOE RMC ASIA Low VIX index does not mean cheap volatility You can’t trade the VIX – you can only trade the expectation of VIX 35 Lowest Volatility? Really? VIX Futures Curve Comparison August 17, 2012 vs. September 2008 30 ! Forward VIX Index (%) 25 20 15
Slide 29: Bull and Bear Markets in Fear
Confidential Bull and Bear Markets in Fear CBOE RMC ASIA Forward volatility is a poor indicator for future movement of spot-vol VIX Index and Forward Expectation of VIX Index Bear Market in Volatility Volatility Falls and Bear Market Moral Harzard Fear Spikes Bull Market in Fear in Fear Market LONG
Slide 30: Volatility protects you from Shadow Short Convexity
Confidential Volatility protects you from Shadow Short Convexity CBOE RMC ASIA Shadow Short Convexity Immeasurable risk introduced when market participants reorganize portfolios in way that contributes to feedback loops Not for Distribution CONFIDENTIAL Source: Walt Disney, Fantasia 30
Slide 31: Everyone is short volatility = dangerous
Confidential Everyone is short volatility = dangerous CBOE RMC ASIA Short Interest in Volatility ETPs has exploded in the 2012-2014 period Yikes! Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 31
Slide 32: Nonlinear Rebalancing of Short VIX ETPs
Confidential Nonlinear Rebalancing of Short VIX ETPs is disaster in making… CBOE RMC ASIA Short Interest in Volatility ETPs has exploded in the 2012-2014 period 100% one day move in VIX could require $2 to $3 billion of vega buying pressure from short and leverage VIX ETPs alone (XIV, SXVY, TVIX & U
Slide 33: Everyone is short volatility = dangerous
Confidential Everyone is short volatility = dangerous CBOE RMC ASIA Short Interest in Volatility ETPs has exploded in the 2012-2014 period Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 33
Slide 34: Left Tail of Volatility
Confidential Left Tail of Volatility CBOE RMC ASIA August 24th, 2015 Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 34
Slide 35: August Volatility Event – Fastest Mean Reversion in History
Confidential August Volatility Event – Fastest Mean Reversion in History CBOE RMC ASIA 1557 days 544 days 515 days 435 days 191 158 days days 151 days 39 days only! Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 35
Slide 36: Left Tail of Volatility
Confidential Left Tail of Volatility CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 36
Slide 37: August Volatility Event – High Volatility of VIX
Confidential August Volatility Event – High Volatility of VIX CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 37
Slide 38: Conditions over Causation
Confidential Conditions over Causation CBOE RMC ASIA Much easier to see conditions that increase the probability of a forest fire than to predict the exact spark that will ignite one Volatility Wildfire Conditions Financial Stress Equity Turbulence Credit Stress Correlation Breakdowns High
Slide 39: Regime Shift in the Prisoner's Dilemma
Confidential Volatility Regime Shift in the Prisoner’s Dilemma CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 39
Slide 40: Regime Shift in the Prisoner's Dilemma
Confidential Volatility Regime Shift in the Prisoner’s Dilemma CBOE RMC ASIA Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 40
Slide 41: You would not drive cross-country using only your rear view mirror
Confidential You would not drive cross-country using only your rear view mirror!!! CBOE RMC ASIA Financial markets do not always look like Nebraska! So why does Wall Street mostly use past volatility to gauge future volatility? Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP,
Slide 42: Left Tail of Volatility
Confidential Left Tail of Volatility CBOE RMC ASIA 1987 Black Monday Crash Buy the FEAR and you will always be protected from the HORROR Not for Distribution CONFIDENTIAL Source: Artemis Capital Management LP, Bloomberg 42
Slide 43: Volatility is your Only Escape from the Prisoner's Dilemma
Confidential Volatility is your Only Escape from the Prisoner’s Dilemma CBOE RMC ASIA GLOBAL MACRO STRADDLE + BETA Not for Distribution CONFIDENTIAL 43 Note: Artemis created a model to simulate the behavior of the equity returns, volatility movement, and “greek” sensitivities of options. Volatility
Slide 44: Are we too complacent?
Confidential Are we too complacent? CBOE RMC ASIA Not for Distribution CONFIDENTIAL 44 Source: Financial Times / September 2014
Slide 45: Artemis Capital Management – Contact Information
Confidential Artemis Capital Management – Contact Information CBOE RMC ASIA Christopher Cole, CFA – General Partner and Founder Artemis Vega Fund L.P. Artemis Capital Management, L.P. 98 San Jacinto, Suite 370 Austin, TX 78701 [email protected] www.artemiscm.com Christopher Cole, CFA CIO and Founde
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