Volatility is becoming an asset class in its own right

An interesting snippet brought to my attention by Doug Noland's Credit Bubble Bulletin dated 26 May 2006:

May 24 – Financial Times (Anuj Gangahar): “Volatility is becoming an asset class in its own right. A range of structured derivative products, particularly those known as variance swaps, are now the preferred route for many hedge fund managers and proprietary traders to make bets on market volatility... When volatility rises like this, it is not long before people begin asking if hedge funds and proprietary traders, using complex trading strategies, are profiting from the falls, or in some mysterious way, driving them. Variance swaps are at the centre of their current activity… A hedge fund manager added: ‘As volatility, in the form of options or variance swaps are sold into the market, volatility drops. We invariably take more risk and the price of risky assets goes up. The introduction of these derivatives in the market then creates a situation that when volatility begins to rise, these trades must be rehedged and/or unwound. This makes volatility rise again.’ So what exactly are variance swaps? They are derivative instruments, traded over the counter. They are among the most intimidatingly complex financial instruments that have yet been designed, requiring a grasp of advanced mathematics, and so there is no trading of them by retail investors.”