Volatility As An Asset Class

I came across an intriguing idea about treating volatility as an asset class, which commonly consists of equities, fixed income, cash equivalents, real estate, and commodities.

Vix and More

Bill Luby is the author of the blog "Vix and More" and he was asked recently to do a guest columnist for Barron's "The Striking Price".

From his website:

"Speaking of which, I have elected to focus on volatility as an asset class for today’s guest column, which bears the title, Ways to Turn Volatility into an Asset Class. Part of my thesis is that 2011 is the year that volatility goes mainstream, largely due to the rise of volatility-based exchange-traded products, which are in the process of bringing volatility trading to the masses. I also repeat an earlier assertion that before the year is over, XVIX and XIV will gain significant traction as buy and hold volatility vehicles."

Ways to Turn Volatility into an Asset Class

There is a quiet revolution going on in the investment world. Volatility, once seen as the domain of institutions and options traders, is about to enter the mainstream and by the end of the year should be well on its way to becoming established as a mainstream asset class.

In sum, volatility is moving into the mainstream and becoming accepted as an asset class. The most recent crop of volatility-based ETPs has accelerated that process with vehicles that are suitable for buy and hold investors and also take advantage of the persistent contango in VIX futures.

These products are frequently misunderstood, but among the group are excellent alternatives for hedging, diversification and speculation. In short, the investment opportunities are substantial enough that it makes it worth the time and effort to learn the idiosyncrasies of these volatility ETPs.

These exciting new vehicles will allow investors and traders to take advantage of a new and more accurate way to hedge risk, speculate and to diversify their portfolios. Given that Black Swans are as common as turkeys these days it pays to know as much as possible about using volatility.