“We are seeing keen interest from investors for this type of strategy whose correlation characteristics are nil to negative to most other alternatives investment strategies as well as being nil or minimal to general market prices except in period[s] of financial stress,” Teilhard said.
The new index would allow investors to benchmark the performance of their investments in volatility arbitrage funds and would provide a data track record for the style that investors such as hedge fund of funds could find useful for portfolio construction.
Teilhard said that investors have been attracted to volatility arbitrage funds in part for their reliance on exchange-traded derivatives -- not OTC products -- which minimizes the credit risk of the funds.
Teilhard said that convertible arbitrage, a strategy whose risk characteristics were comparable to certain kinds of volatility arbitrage, was falling out of favour with investors. “A lot of investors used to have exposure to volatility trading through convertible arbitrage managers and then I think what happened was because of the current prices of the convertible markets the delta of the implied option in the converts is quite low, so there’s not so many trading opportunities as before,” he said.
On the funds composing the index, Teilhard said they would be US and European-based and trading equities, fixed income and FX. “They would not specifically arb US against Europe,” Teilhard said.
The index will be composed of ten volatility arbitrage funds, and potentially more if the index catches on, according to Fimat. The weighting method for the index is not yet final. Performance figures from contributor funds to the index, which is reported monthly, will be audited.
Teilhard said there were no immediate plans to offer structured products based on the index.
The week on Risk.net, July 7-13, 2018Receive this by email