No Volatility, No Problem: How BlackRock, Amundi Are Beating It

(Bloomberg) -- A collapse in volatility across currencies is leading fund managers to scour every corner of the market for profit opportunities.

Central bank inaction has helped push measures of price swings to the lowest in years. Fund managers from Amundi Asset Management to Allianz Global Investors say this is causing them to turn away from traditional bets on the dollar and euro and toward emerging markets, carry trades and taking cheap punts in options.

“The cost of being wrong in options has never been lower,” said Timothy Graf, head of EMEA macro strategy at State Street Bank & Trust. “This really is where the current environment is interesting.”

Here’s what other portfolio managers and strategists are advising for a low-volatility world.

Look at Emerging Markets

The lack of big moves across developed markets means currency traders “need to venture into the darker corners of liquid emerging-market currencies,” according to Swissquote Bank SA’s head of market strategy Peter Rosenstreich.

The spread between Group-of-Seven and emerging-market volatility is widening. Hedge funds have begun re-weighting emerging markets versus the dollar, according to Lyxor Asset Management’s senior cross-asset strategist Philippe Ferreira.

Using the yen as a funding currency to buy the Indian rupee, Chinese renminbi or the Philippine peso would have yielded significant gains, according to Societe Generale SA strategist Kit Juckes.

Bet on Carry

Carry also looks attractive in this environment. This strategy of betting on divergence in interest rates is doing well, with a Bloomberg index measuring carry returns from eight emerging markets funded by the dollar gaining for a third week.

“I describe the current environment as everyone sitting on their hands not wanting to do too much,” said Andrew Cole, a fund manager at Pictet Asset Management. “That’s why carry trades are popular right now.”

Allianz money manager Kacper Brzezniak said he went long dollar-rand at the start of the year, before it rallied in February and March. “We got about 6 percent of the move, and I am very happy with that,” he said.

Take Some Risk

An upside of the confoundingly low levels of volatility is that it’s cheaper to take risks. According to State Street’s Graf, it’s worth taking directional bets while the cost is so low. He points to dollar-yen calls as an opportunity to make some profit.

Some Asian sovereign investors and large hedge funds have been using low-cost option structures such as butterflies and double no-touch trades to boost their trading revenue, according to traders in Europe, who asked not to be identified because they aren’t authorized to speak publicly.

“Low volatility means little movement in the markets and by definition makes it more difficult to extract alpha out of FX moves,” said Andreas Koenig, head of global currencies at Amundi. “We are expressing more and more positions via options.”

New Playbook

Traders need to throw away the old playbook in range-trading markets, said Allianz’s Brzezniak. A low-volatility environment makes it harder to make money on trend or momentum strategies as the moves tend to be short-lived.

“Likewise, a lot of people look at charts, they see some level being broken and go all-in and some massive move happening,” he said. “As we have seen in range-bound, mean-reverting markets, that hasn’t worked.”

Nimble on Pound

The pound has been trading in an even tighter range than its peers since the Brexit deadline was extended until October, with volatility slumping. The key to making profits in this environment is timing to take advantage of brief periods of volatility on headlines, said BlackRock Inc.’s chief fixed-income strategist Scott Thiel.

“There’s going to be volatility within a relatively narrow range, so the willingness to trade within that range can be fruitful if you get the range right,” he said. “The moves are big enough to make money even in this relatively stable environment we’ve been in, but it’s very tactical in nature, it’s very timing-sensitive.”

--With assistance from Vassilis Karamanis and Anooja Debnath.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Scott Hamilton

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