Institutional investors are increasing exposure to short volatility and dispersion strategies to provide a source of carry in a risk-on market.
Premialab data show Institutional investors, particularly hedge funds, turning to short vol and dispersion strategies in Equity and Rates markets while trimming exposure to rolling VIX options structures, and directional rate trades. This comes as vol remains contained and sector level dispersion dominates returns.
Short volatility strategies in equities and rates generated positive returns, though outcomes diverged sharply by construction, said Dylan O’Connell, Director at Premialab. “Selling variance where volatility stayed predictably low worked,” he said in a recent webinar, adding, “Strategies trading rolling [Cboe Volatility Index] futures options had structural roll costs in a persistent contango environment.”
“The fourth quarter showed that predictability mattered more than protection,” O’Connell said. “Strategies that could consistently monetize time decay and dispersion performed well as volatility stayed episodic rather than persistent.”
“Performance in Q4 was highly sector-specific,” he said. Theta-driven dispersion strategies benefited from time decay, with stronger performance than gamma and vega neutral dispersion as realized vol remained contained despite elevated single stock activity.
O’Connel said these patterns are likely to continue shaping systematic performance in 2026, with outcomes increasingly determined by structure rather than broad factor exposure.
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