Short volatility exposures pose risks

Hedge funds and other sophisticated investors have been positioning themselves as sellers of volatility and correlation, despite recent global events. But some market participants are urging caution. Mark Pengelly reports

Selling volatility and correlation has been a consistent money-spinner for hedge funds over the years – and an environment of low realised volatility since September 2010 has tempted many back to this trade. That hasn’t changed over the past month, say dealers. Some investors seem relatively unfazed by political upheaval in the Middle East and an earthquake in Japan on March 11, which triggered a tsunami and has even led to fears of a nuclear meltdown. These sellers believe markets will become