Demand for yield warms Asia to volatility

Yield-enhancement strategies that can tackle the challenge of low interest rates and provide downside protection are gaining popularity among institutional and professional investors in Asia.

The launch of futures as the first exchange-listed volatility products on the HSI Volatility Index (VHSI) in Hong Kong and the Nikkei Stock Average Volatility Index (VNKY) on the Osaka Stock Exchange in Japan last February was greeted by market participants as a first step towards the development of volatility products, in line with investors’ increasing interest in tail-risk hedging solutions.

“Volatility products are a key focus this year in Asia. There’s definitely an interest from Asian investors in trading volatility products under Asian hours because so far, the only thing they had were products such as Vix [Chicago Board Options Exchange Volatility Index] products, and that was not necessarily answering all their needs,” says Jerome Favresse, equity derivatives research, Asia-Pacific at Barclays Capital in Hong Kong. “At the moment, after a few weeks of trading, liquidity is not yet there, but we have to put that in context as well and need to let the products grow over time as more people start using them.”

One way to boost the trading of volatility products would be the availability of instruments that would facilitate volatility trading, such as exchange-traded notes (ETNs).

“Having such instruments to trade volatility would help as you need a vehicle to drive investment into it,” says Gregory Yu, head of equity derivatives structuring and client solutions, Asia-Pacific, at JP Morgan in Hong Kong. “Few people trade VHSI/Vix futures on a daily basis even on the institutional side.”

Another challenge standing in the way of a greater take-up by investors is the fact that there is still an active variance swap market in Hong Kong, says Simon Karaban, director of research and design at S&P Indices in Sydney.

“HKEx is really competing with the over-the-counter market for a slice of the action with regard to volatility, “says Karaban. “Volatility as an asset class has matured in the US after years of growth while in Hong Kong it is still a relatively new concept. It’s a question of time and education, understanding the intricacies of the VHSI. It will take some time for investors to get comfortable trading the futures but once there is more demand from investors banks will respond to that demand and we’ll potentially see the launch of ETNs and structured products linked to the VHSI.”

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