In recent weeks, markets have been experiencing a noticeable decline in realized volatility. For seasoned investors, this echoes memories of 2017—a year characterized by an almost relentless “volatility crush.” Back then, volatility metrics across the board hit historic lows, while equities drifted steadily higher in a low-risk, low-reward environment. This unique market regime led many to position accordingly: short volatility strategies flourished, and risk assets performed well with little disruption.
Fast forward to today, and the surface-level comparisons are easy to make. Realized volatility has declined sharply, and markets seem oddly calm despite macroeconomic uncertainty, geopolitical risks, and ongoing rate dynamics. Naturally, many are wondering: are we heading into another volatility suppression cycle like 2017?
But a deeper look suggests this time is different.
The Current Landscape: Quiet Surface, Turbulent Undercurrents
While volatility has indeed declined, the underlying market structure today is far from the complacency of 2017. Back then, volatility sellers were dominant, and the market had a nearly one-way drift upward. Today’s environment is more nuanced.
Over the past several weeks, a strategy combining long equities and long volatility exposure has shown resilience. This is a key divergence from 2017, when long volatility positions were a consistent drag on portfolios. The fact that long vol hasn’t been punished during this recent vol crush suggests a more balanced dynamic. Volatility may be low now, but it’s not being aggressively suppressed in the same way.
Instead of betting on a sustained decline in volatility, market participants appear more cautious, and there’s a healthy respect for the possibility of spikes in uncertainty. This restraint could be a sign that investors recognize today’s calm may be more fragile—and more reactive to surprises.
Why Long Volatility Still Makes Sense Today
The relative success of long volatility positioning in the current environment is worth highlighting. In typical low-vol regimes, holding volatility exposure becomes expensive and often unrewarding. But in today’s case, owning volatility has offered portfolio protection and diversification, even as spot equity prices have climbed.
Why? Several factors could be at play:
- Macro Tail Risks Remain Elevated: Geopolitical tensions, central bank policy shifts, and economic uncertainty all continue to hover in the background. While they haven’t disrupted markets yet, they create a latent risk premium embedded in vol markets.
- Structural Demand for Hedging: Institutions have been more cautious in their positioning post-2020, and systematic strategies that used to crush volatility may not be as dominant or aggressive today.
- Event Risk Pricing: Even in a low realized vol environment, the market is still pricing in the potential for large moves around specific catalysts—earnings, policy decisions, or geopolitical developments—providing some support to implied volatility.
Don’t Be Fooled by the Calm
While realized volatility has collapsed, the current market environment is materially different from 2017. Back then, the vol market was crushed under the weight of structural short vol strategies and relentless calm. Today, markets are quieter—but not complacent.
The relative strength of a long equity + long volatility portfolio indicates that volatility still holds a valuable place in portfolio construction, not just as a hedge, but as a viable strategy component in its own right. It may not be the same kind of vol crush we’re used to seeing—because this time, both risk and reward are more symmetrically distributed.
As always, the calm in markets should not lull investors into a false sense of security. This isn’t a replay of 2017. It’s something different—and perhaps, more balanced.
IBAFIN 
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