CBOE RMC – Differentiating and Benchmarking Volatility-Based Investment Strategies

The first session after lunch at today’s Risk Management conference was a combination presentation and panel discussion.  The first part of the session featured Chris DeMeo from Nu Paradigm Investment Partners, LLC who discussed the CBOE EurekaHedge Volatility Indexes which were introduced in August of 2015.  These indexes addressed the lack of an appropriate benchmarks for analyzing volatility based strategies.

The indexes are divided into four categories –

  • Long Volatility
  • Short Volatility
  • Relative Value
  • Tail Risk

Needless to say comparing a short volatility fund to a tail risk fund is not an apples to apples comparison.  More information on these indexes may be found at www.cboe.com/eurekahedge

The panel discussion participants were

Joe Aiken, Portfolio Manager, Malachite Capital Management
Dennis Davitt, Managing Principal, Chief Investment Officer, Harvest Volatility Advisor
Satoshi Iwanaga, Chairman, Eurekahedge
James Koutoulas, CEO, Typhon Capital Management
Alan L. Salzbank, CIO and Co-Founder Gargoyle Investment Advisor, LLC

A couple of highly discussed questions included –

“How has the industry changed?”

  • A panelist noted that they moved to index options due to their consistently overprice nature
  • Methods of shorting volatility have expanded with the creation of listed VIX derivatives
  • It has become an asset class, but many market participants have a tough time getting their mind around volatility as an asset class
  • There may be more of a focus on counterparty risk and CBOE probably benefits being the home of listed derivatives

“How do your approach tail risk or tail risk funds?”

  • Tail risk funds are typically too expensive for the protection they offer
  • A more dynamic approach to tail risk management makes more sense
  • The worst thing that can happen to a tail risk fund is a tail risk event
  • Tail risk is more interesting as a thesis than as a strategy
  • One fund manager noted he finds it interesting money managers are reluctant to outsource their derivative exposure