Drilling Down on Long Vol

Published on
March 2nd, 2020
33 minutes

Activist Short-Selling: Uncovering Fraud and the Future

Drilling Down on Long Vol

The Expert View ·
Featuring Matt Rowe

Published on: March 2nd, 2020 • Duration: 33 minutes

Should I be short volatility or long volatility? After last week’s dramatic sell-off the answer might seem obvious, but Matt Rowe of Headwaters Solutions argues the answer is both. Rowe and Headwaters love the long vol trade, but only as an appropriately sized portion of a portfolio that is in general, short vol. He makes the case that most portfolios are indirectly short vol and that there is nothing wrong with that, as short vol is how money is and will continued to be made over time. He also answers the questions of if and how long vol can be added to a standard retail portfolio. Filmed on February 25, 2020 in New York.



  • TW
    Tom W.
    4 March 2020 @ 23:17
    Interesting! Please help me connect the dots. How does sailing across the ocean relate to short vol?
    • CY
      Charles Y.
      18 March 2020 @ 23:01
      Crossing the ocean is taking a lot of risk, ie. volatility. If you choose to go on the voyage you are presuming (hoping) that you won’t sink and you will get the reward for your risk. Same if you buy an asset, I believe that is what he meant.
  • TS
    Theodoros S.
    2 March 2020 @ 18:32
    The point of investing is not arbitrage neither hedging in my opinion. The main point is to buy shares of real businesses that grow. Then businesses grow and produce for the common good and the economy. Then it is a win win situation for all. Transition of risk is vital and should be happening in markets. However I think gambling and especially leveraged gambling which is also important for the market should have a smaller part of the pie in the markets.
    • MW
      Max W. | Real Vision
      2 March 2020 @ 19:49
      I see your perspective and agree in general with the argument, but what makes exchanging cash for ownership rights on the secondary market any different? Unless you are buying an IPO or secondary offering direct from the company, the money you exchange to buy the shares is not being invested in CaPex, OpEx, R&D, etc. If buying on the secondary market, the buyer has recognized what they think is an inefficiency that will be corrected over time and they are taking that bet, much in the same way an arbitrager is. The arbitrager's bet may not be based on the same growth thesis, which I agree in general is what drives the economy and thus society forward, but that doesn't change the fact that what most people consider to be investing is closer to speculation. The voting rights one has a share holder are the only clear argument I see to justify secondary market purchases as investing and not speculation. Leverage is a whole different animal and I agree it can create undue risk.
    • JW
      Jason W.
      2 March 2020 @ 23:06
      Good point Max. Where do dividend paying stocks fit into this ?
    • JB
      Josh B.
      2 March 2020 @ 23:50
      Re: Max's comment While I completely don't disagree I can think of a few ways an active secondary market can 'help' businesses grow. You mentioned voting rights which I think is a clear and quite important point. Allowing investors to impact board composition and make proposals is quite a big factor in investing. So if we count it as the only justification as you mentioned I think it would probably be enough on its own. The change in a share price can reflect the market's view of management strategy and therefore potentially help management make good decisions by using the wisdom of crowds (can also have the opposite impact though). A secondary placement may not be in the immediate future but an active secondary market allows more accurate pricing for a secondary placement allowing management to better gauge their financing options and provide hurdle rates to investment. The share price can also act as an incentive for management if they have any stock-based compensation allowing companies to attract talent and depending on the incentive scheme promote long-term strategies. Also, while many investors are trying to buy under priced stocks to make gains. Some (and perhaps an increasingly large amount given value's relative underperformance) are happy to take Buffet's strategy of buying a great company and a fair price and allowing compounding capital to work its magic. Perhaps it can be considered time arbitrage.
    • Ja
      James a.
      8 March 2020 @ 12:33
      the point of investing is to make money silly.
    • AI
      Andras I.
      10 March 2020 @ 01:20
      Theodoros S.: the point is of course not hedging but it can even help your idealised case of investing in companies for the common good as hedge can remove the fear factor that makes markets so risky so they can focus on real value. Don't confuse with Matt Rowe's point of view with a general investment approach (he clarifies it at the end), he is selling hedging products and he's getting compensated for swallowing your risk (think of it as a CDS) - he categorically says he believes short-vol/long-beta as the mainstream portfolio. Max W.: secondary markets are crucial for firms and not just self-serving. The goal of the firm is shareholder wealth maximisation and this has to be measured somehow - the best (most forward looking, most frequently updated, most accessible to management) proxy is share price - set by the secondary market (even with all its inefficiencies and bias). The more the market likes the company, the more shareholder value it generates. This helps to balance undervaluation too (so by speculating, you're still helping the company). The price is a proxy for the capability to access capital for future investments and generated cash flows - to answer your capex/r&D argument. The company will have the secondary market to go to where their cost of equity will depend on the market's expectations. Alternatively they can go for debt but then they also will be judged by market standards (through debt ratios against market equity, credit ratings...etc) and they will have to pay the price (interest rate) accordingly. But at the end, speculator vs investor is just a play on words - investors are also speculating in a way that they're not willing to buy (by their individual standard) overpriced stocks and they are speculating on market inefficiencies. But you could have the same argument about buying into IPO's too.
  • Ja
    James a.
    8 March 2020 @ 14:26
    great guy, extremely smart. would love a more interactive conversation with a smart dude like mike green
  • JW
    Joel W.
    5 March 2020 @ 15:52
  • MN
    Michael N.
    4 March 2020 @ 19:10
    great interview thank you. very smart guy would love to see Mike Green interview him or have him converse with Mr Cole
  • GC
    Gary C.
    3 March 2020 @ 01:18
    Great discussion of Volatility that expands the Cris Cole 100 year portfolio