Recent spikes in Korean stock market volatility following the global sell-off could see an upswing in margin calls in its autocallables market, potentially driving the index even lower, with investors taking advantage of the higher volatility to obtain higher yields.
Horseman Capital Management, the London-based contrarian long/short hedge fund led by Russell Clark, said on Thursday that the continued issuance of autocallables – structured notes which have automatic calls when a certain upside barrier is reached – suggests investors are looking to capitalise on the recent volatility spike.
Historically a highly volatile market, the KOSPI 200 has seen volatility levels tempered in recent times by the long bull market in semiconductors and rampant sustained volatility selling.
But KOSPI volatility has recently broken out to levels not seen since 2011, Clark observed.
Describing the KOSPI 200 as the “spiritual home” of autocallables, Clark – a renowned hedge fund bear whose global long/short equity strategy is reportedly up more than 20 per cent so far this year – said the vol spike chimes with a “steep decline” in the share prices of French banks which typically structure many autocallable products.
“If autocallables are triggered, then implied volatility should move even higher from current levels. For clearinghouses, the high level of both implied and realised volatility should lead to increases in margins,” Clark said.
“Market volatility has risen significantly, but margin and collateral in the system still looks too low. Should autocallables break barriers in the KOSPI 200 or the Euro Stoxx 50, then the structurers will turn into volatility buyers, not sellers. Higher volatility leading to margin calls look likely, which could drive the market lower.”
