But in 2016 investors changed their approach to accessing fear and volatility, seeking out other assets that are increasingly being used to diversify and reduce risk within a portfolio.
Gold has long been a safe haven in volatile times. Compared with the Vix, it possesses the added benefits of liquidity, tight spreads and the potential to be an inflation, as well as fear, hedge.
But the risk versus reward pay-off will also be very different. Gold may spike 5-10% on a geopolitical event whereas the Vix, especially at its current lows, could jump considerably more than that.
The two main macro events of 2016 were both largely expressed by investors through the medium of currency exposure rather than equities, bonds or gold.
The first event was the EU referendum, when equity volatility popped in response to the result, but then quickly returned to a benign state. It was through shorting sterling that investors expressed their fears over the uncertainties created by the Brexit vote.
The same happened with the US elections. Throughout the campaign the dollar versus the Mexican peso became the proxy for investors to express their fears over a Trump victory.
So, will currencies become the key battle ground for the unpredictable European elections in 2017?
The early indications are that it will not be so.
The euro is just too complicated a beast and too blunt an instrument. Neither will the Vix be the right trade, because this is a sovereign not corporate event.
What is more likely, as with the euro crisis in 2013, is that European sovereign spreads over the German bund will become a proxy for speculators.
In France, spreads have blown out as the prospect of Marine Le Pen winning the national elections has become a distinct possibility. Meanwhile, Greek spreads continue to simmer as their debt repayment date comes closer.
So where does that leave UK investment portfolios? Inadvertently, the weakness of sterling last year was a boon for portfolios with non-sterling exposure, but it is likely many were not carrying that risk as a deliberate Brexit hedge.
However, does it make sense, even at sterling’s current levels, to hold it against further Brexit-induced weakness as the UK government attempts to turn the referendum vote into reality?
And how do wealth managers gain access to some of these other fear-based trades?
