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A theory, advanced by several industry participants, describes a feedback loop in which calm markets make selling insurance against volatility profitable, which makes the markets more calm, which then makes selling insurance yet more attractive. And so on and so on.
The slump in volatility has forced big money managers to change their approach to insurance. They used to buy insurance in the form of options contracts to protect their portfolios against sharp moves. Now, they are selling it. GAM Holding AG was a buyer last year: It tried to shield against the risk of political events by betting on volatility. But despite the U.K.’s decision to leave the European Union, Donald Trump’s election and the failure of Italy’s constitutional reform, such insurance failed to pay off. The firm has stopped buying it, said Larry Hatheway, GAM’s chief economist.
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