IVOL hedges itself against inflationary pressures


International Monetary Fund urged US Federal Reserve to decline faster as inflationary pressures continue to rise, reports show CNBC.

While the Fed was already considering a faster cut, the introduction of Omicron, the latest variant of COVID that appears to be highly contagious, and the growth of several inflationary pressures, such as a missed big jobs report for November, have pushed the IMF to double its efforts. for a faster Fed reduction.

“We see reasons for monetary policy in the United States – with gross domestic product close to pre-pandemic trends, tight labor markets, and now widespread inflationary pressures – to place greater emphasis on downside risks. ‘inflation relative to other advanced economies, especially the euro area,’ the IMF said in a blog post.

In addition to supply chain concerns over fears of Omicron’s global effects, a disappointing jobs report was released this morning which showed job growth was only 210 000 for November on a forecast of 573,000, reports CNBC. This is a sign that the slowdown in hiring began before Omicron’s discovery, and may indicate continued stronger inflationary pressures.

Hedge against volatility and inflation with IVOL

The Quadratic hedging ETF against interest rate volatility and inflation (IVOL) of KFAFunds, a KraneShares company, is designed to be double hedged against increased volatility in fixed income and / or increased inflation. The fund also seeks to maximize increases in the yield curve, caused either by rising long-term interest rates or falling short-term interest rates; both are linked to sharp declines in the stock markets.

IVOL is the first of its kind in active and passive options and provides access to the OTC fixed income options market, the mechanism it uses for long-term interest rate volatility. The fund invests in a mix of full maturity US Treasury Inflation-Protected Securities (TIPS), which are US government bonds that increase in principal with inflation.

It also invests in long options that are directly linked to the shape of the curve of US interest rate swaps, which steepens when the spread between the exchange rates of long-term debt instruments and the Short-term debt instruments increase, flatten when the spread decreases, and reverse when the spread is negative.

Options are bought in advance with a premium in the OTC market, which usually offers more flexibility between buyer and seller, but there are less protections than on an exchange and no limit on daily price movements. . The counterparties do not have to post variation margins and there is no additional outflow of funds or future liability to the fund under options. The only risk is the premium paid in advance, as well as IVOL’s option contracts being open to counterparty risk, the risk of non-execution of an option counterparty.

IVOL is actively managed by Quadratic Capital Management, an alternative asset management firm experienced in the options and volatility markets. He plans to invest less than 20% of the fund in option premiums and seeks to buy options with an expiration period of between six months and two years.

IVOL has an expense ratio of 1.05% and has approximately $ 3.3 billion in assets under management.

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