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Updated: Apr 14


By Michael Allison, CFA



Volatility as a Diversifying Asset Class

A few weeks ago we wrote about Fat Tails and Fat Pitches (The Sunday Drive).


Then came April 3rd, and as the meme goes:



The past week or so has reminded us of a timeless investment truth: volatility is not just a risk metric — it’s an asset class in its own right.


On April 9th, the S&P 500 registered one of its most volatile sessions ever, joining a list dominated by moments like Black Monday 1987 and the depths of 2008 (Sherwood).


At the same time, the CBOE Volatility Index (“VIX”) fell by over 35%, the largest single-day decline in its history (Creative Planning).


History tells us that periods following sharp VIX declines often deliver superior equity returns over 1–5 years, relative to average market periods.


Volatility Is Not Just Risk — It’s Opportunity

This suggests that volatility events act as “stress tests” that reset investor expectations, flush out leverage, and create asymmetrical return opportunities.


More interestingly, viewing volatility itself as a diversifier — through instruments like options, futures, volatility-targeting strategies, or structured notes — can enhance a portfolio’s robustness.


Long volatility exposure tends to outperform precisely when traditional assets falter, as evidenced by how S&P 500 “+/- 3 sigma” (standard deviation) days cluster during crises (Tier1Alpha).


Time to Move Past the 60/40?

Most investors are still trapped in the old “60/40” mindset, relying on asset classes that become increasingly correlated during “tail” events.


Instead, sophisticated investors and asset allocators can think in terms of regimes (The Sunday Drive):

Volatility spikes aren’t anomalies — they are predictable features of a complex, reflexive system.

Taking this view, being long volatility is less about speculation and more about intentional structural diversification.


It’s a contrarian but increasingly necessary framing for an era where financial markets are “organic” and “free-range,” to borrow Sherwood’s apt description.


A Final Thought

In short: volatility isn’t something to fear — it’s something to own.


Sources:


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