Volatility Risk Premia: Stick, Twist or Fold

While there is little dispute among investors and academics that the volatility risk premium (VRP) is a long-term structural feature of markets, it remains an overlooked investment for many (after all, it is not the same as naked option short selling, it is systematic harvesting of the volatility risk premia or implied volatility minus realized volatility). After the equity VRP enjoyed a strong performance in 2017, last year was more challenging, given the combination of several market shocks and the transition of implied volatility from low to more normal levels. Despite this backdrop, a well-structured multi-asset VRP portfolio weathered 2018 well after a strong 2017 and started 2019 convincingly.