Volatility Risk Premium: Stick, Twist or Fold

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In Short

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 a controversial investment for many, and this despite fundamental differences between the systematic harvesting of the volatility risk premium and significantly more risky strategies such as naked option selling.

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.

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