Volatility as an Asset Class for Long-Term Investors

This work shows how long-term investors can benefit from adding volatility as an asset class to their portfolio. Two types of "structural" exposure – long implied volatility and long volatility risk premium – are now simple to implement. Implied volatility exposure can be used to significantly reduce the risk profile of the portfolio, and especially extreme risks. Adding a volatility risk premium investment is less appealing : it substantially increases returns for a given level of risk, but at the cost of higher extreme risks. However a combination of the two volatility strategies is very attractive, thanks to fairly effective reciprocal hedging during periods of market stress. It delivers enhanced absolute and risk-adjusted returns, with smaller extreme risks than a traditional portfolio. Over the long term, volatility strategies make it possible to build portfolios that are more efficient than a pure-bond or equity/bond investment.