Multi-asset outlook Part 7 – Volatility 2026: Calm markets, high uncertainty – volatility strategies of interest

FERI believes that the environment for volatility strategies looks positive for 2026. Such strategies are based on the fact that the (implicit) volatility expected by market participants is historically usually higher than the actual (realized) volatility. Investors are willing to pay for hedges against unexpected market movements, even if these ultimately fail to materialize. “Those who systematically sell options can collect this premium,” explains Horst Gerstner, Head of Volatility Strategies at FERI. At the same time, hedges are put in place to limit extreme risks and cushion extreme losses.

Discrepancy in risk perception

In April 2025, stock market volatility rose significantly after US President Donald Trump threatened to impose comprehensive tariffs on what he called “Liberation Day.” In the second half of the year, however, the volatility environment was surprisingly calm despite numerous potential risks: the VIX volatility index traded at the lower end of its historical range. However, rising geopolitical tensions, structural inflation risks, fiscal uncertainties, and increasing political polarization suggest that this situation is not permanent and that volatility could increase at any time, as it did in the wake of Liberation Day. Gerstner sees a striking discrepancy: “The very large difference between political uncertainty on the one hand and actual volatility on the other shows a significant gap between the perception of uncertainty in the real economy and among market participants.” In other words, measured against global uncertainties, the markets are currently pricing in unusually little risk (see Chart 1).

A closer look also reveals that the premium on implied volatility relative to realized volatility has increased: given the numerous uncertainties, buyers of hedges are willing to pay a comparatively high premium. For option strategies whose return potential is based on the difference between implied and realized volatility, as described above, this contradictory environment offers opportunities.

Diversifying portfolio component

Volatility strategies are also becoming more relevant from a portfolio perspective. The phase in which portfolios benefited greatly from a stable negative correlation between equities and bonds has become less reliable since 2020/2021 (see Chart 2). This may weaken diversification effects. “In this environment, volatility strategies can help to diversify returns over a longer period of time,” explains Christoph Sporer, Director of Portfolio Management in FERI's volatility team. “Volatility strategies can also be an interesting alternative to high-yield bonds at present, especially when high-yield spreads leave little buffer for additional risks.”

A possible interest rate scenario for 2026 adds to this: if yields rise again, for example due to renewed inflation, bonds with longer maturities tend to come under pressure. “As long as there is no major turmoil on the capital market, volatility strategies can even help to stabilize returns in such an environment,” says Sporer.