Hedge Funds and Volatility-Based Strategies Discussion at RMC Asia

The first post-lunch presentation in Hong Kong was actually a hybrid presentation / discussion panel.  Things started off with the Chairman of Eurekahedge, Satoshi Iwanaga from Eurekahedge which created and calculates four indexes to measure the performance of different volatility oriented strategies.  This segmentation is logical since strategies that focus on volatility can vary greatly in their process.

The four CBOE Eurekahedge Volatility Indexes are:

  • CBOE Eurekahedge Short Volatility Index – The short volatility index is an equally weighted index of constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers who take a net short view on implied volatility with a goal of positive absolute return. The strategy often involves the selling of options to take advantage of the discrepancies in current implied volatility versus expectations of subsequent implied or realized volatility.
  • CBOE Eurekahedge Long Volatility Index – The long volatility index is an equally weighted index of constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers who take a net long view on implied volatility with a goal of positive absolute return.
  • CBOE Eurekahedge Relative Value Volatility Index – The relative value volatility index is an equally weighted index of constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers that trade relative value or opportunistic volatility strategies. Managers utilizing the strategy can pursue long, short or neutral views on volatility with a goal of positive absolute return.
  • CBOE Eurekahedge Tail Risk Index – The tail risk index is an equally weighted index of constituent funds designed to provide a broad measure of the performance of underlying hedge fund managers that specifically seek to achieve capital appreciation during periods of extreme market stress.

The second half of this session involved a roundtable discussion regarding volatility based strategies.  Satoshi was joined on stage by El Mehdi Benhmade from Capula Investment Management, Chris Cole from Artemis (who also presented before lunch), Govert Heijboer from True Partner Advisor, and Vishnu Kurella from Caxton Associates.

Some highlights from the discussion include –

  • Every strategy can be boiled down to either long or short volatility so in reality volatility may be considered the only asset class
  • Each panel member discussed how they navigated the markets during late August and all had very different approaches based on their individual strategies
  • In order to run a long volatility fund you need to educate clients so they realize certain years will not be good (think 2013) for long volatility funds
  • One of the most difficult decisions with respect to trading volatility is taking the other side of the flow of orders especially because many dealer cannot warehouse risk like they use to
  • Finally, it was noted that short VIX ETP growth has altered the market a bit for volatility sellers