Doubts dog equity dispersion as market grows up to five-fold

Some say $500 million vega notional – or more – in popular equity derivatives trades could be dampening volatility

Equity dispersion has become the relative value volatility trade of choice for hedge funds and asset managers, with notionals up as much as five-fold in just four years. It’s a growth spurt leading some to question whether the strategy could be dampening volatility on the Standard & Poor’s 500.

Participants broadly agree that equity dispersion, in which investors bet the volatility of single stocks will outpace index volatility, now represents at least $500 million of vega notional – the amount