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Monetizing Nasdaq-100® Tail Hedges

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Monetizing Nasdaq-100® Tail Hedges

Testing the Effectiveness of Implied Volatility Signals

Study Summary

We explore the effects of an implied volatility based monetization scheme on a laddered put strategy on the Nasdaq-100 Index (NDX). The strategy holds 1, 2, and 3 month put options on NDX struck 20% out of the money. We purchase new 3 month puts at each third Friday expiry, spending 10bps per month (1.2% annually) of a total portfolio notional. We also analyze performance with a joint long position in NDX to demonstrate the value of systematic monetization of options contracts to lock in gains from adverse market events. Specifically, when a monetization event occurs, proceeds from the sale of puts are stored in an interest bearing cash account until the next roll day when proceeds are invested firstly into a new 3 month put and the remainder into NDX. Implied volatility is referenced as the 50 delta 1 year implied volatility and the 50 delta 1 month implied volatility. The study period ranges from January 1st, 1997 to February 15th, 2022.

In this study, we monetize one third of the options position if the 1 year implied volatility surpasses a 35% threshold and sell the remaining two thirds of the position if 1 month implied volatility surges past a 70% threshold.

Results

We found that there was a significant benefit to including an implied volatility based monetization scheme in reducing impact from market drawdowns. In our study, monetization served as an effective mechanism to capture gains from adverse market events. We found that the monetized strategy reduced annual volatility by 115bps while returns were reduced by only 2bps. By contrast, the unmonetized strategy was effective in reducing risk, but with significant cost as annual returns were lowered by 52bps.
As a standalone overlay (i.e. not including the underlying asset), the monetized strategy outperformed the unmonetized version on a cumulative basis. The unmonetized strategy realized cumulative returns of 16.78% while the monetized strategy realized cumulative returns of 8.77%. The maximum 1 month return of the monetized strategy was 6.26% vs. only 1.89% in the unmonetized strategy.

Summary Performance Metrics

Full study period from 1997 to 2022

Historical and simulated index performance is not necessarily indicative of future results. The information provided in this document does not constitute investment advice. Volos is not an investment advisor. Volos and its affiliates accept no responsibility whatsoever for any loss or damage of any kind arising out of the use of any part of the company products or the information contained therein.
© Copyright 2022. All rights reserved. Nasdaq is a registered trademark of Nasdaq, Inc. 1473-Q22

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Gaining Momentum: Where Next for Trend-Following?

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Gaining Momentum: Where Next for Trend-Following?

We investigate trend-following’s strong performance in the first five months of 2022 and, more importantly, what we might expect going forward given current macro-economic themes.

For institutional investor, qualified investor and investment professional use only. Not for retail public distribution

 But is trend- following’s recent positive performance just predicated on continued worries around inflation?

1.  Introduction

Trend-following indices, such as the SG Trend and Barclay BTOP50, have posted their best year-to-end-May returns since 20001, against a backdrop of poor performance from traditional asset classes such as equities and bonds. This should not come as a surprise: after all, we are seeing the presence of strong trends in futures markets which are sensitive to macro-economic themes such as inflation. We also note that, in contrast to recent history, this performance alongside weak equity markets has occurred, and even been supported by, simultaneous weakness in fixed income markets.
But is trend-following’s recent positive performance just predicated on continued worries around inflation? Or are there further prospects that could act as  additional opportunities for the strategy this year?

2. Trend-Following: The Alternatives Strategy du Jour

Trend-following strategies have had an outstanding 2022 so far, outperforming not only traditional asset classes like stocks and bonds, but also hedge funds in general (Figure 1). In fact, both the SG Trend and Barclay BTOP50 indices, which include trend-following managers, have posted their best year-to-end-May returns since 2000.

Figure 1. 2022 Returns of Various Traditional and Alternative Investments

Source: Man Group, Bloomberg, MSCI, BarclayHedge; as of 31 May 2022. HFRI data to 30 April 2022.

Note: World bonds represented by Barclays Capital Global Aggregate Bond Index Hedged USD. World stocks represented by MSCI World Net Total Return Index Hedged USD.

We have written extensively about trend-following’s persuasive credentials during inflationary periods and equity crises. As such, with inflation’s return and weak equity markets this year, it is perhaps not too big a surprise that trends are back in vogue.

What we have found in 2022 is that for the first five months at least, simple is best: pure trend strategies trading the largest futures markets have been the star performers.

3.  Features of Trend-Following’s Performance This Year

As Figure 1 shows, the SG Trend and Barclay BTOP50 indices returned 26% and 16%, respectively, as of the end of May. Both of these indices contain trend-following managers, and have outperformed not only traditional asset classes like stocks and bonds, but also hedge funds in general.

The outperformance of trend-followers over traditional assets and hedge funds can possibly be explained by the number of constituents in the indices. The BTOP50 and SG Trend indices have 20 and 10 constituents, respectively, which suggests there is considerable dispersion between trend-following managers in 2022. This could be down to various factors – risk targets, market allocations, models and trading speed, etc. – which are hard to quantify without detailed knowledge of how managers trade.

At Man AHL, however, we are fortunate to be running multiple trend-following programmes, spanning the full spectrum of markets, models and risk budgets, so we are potentially in a good position to isolate the real drivers of performance. We discuss some of these, using our own experience, in more detail below.

3.1.  Traditional Trumps Non-Traditional in 2022

What we have found in 2022 is that for the first five months at least, simple is best: pure trend strategies trading the largest futures markets have been the star performers. In a sense, this is intuitive. Macro-economic themes are driving markets, in our view; inflation, central bank activity, war, supply chain disruption, de-globalisation and post- pandemic recovery, to name but a few. They are all interlinked, of course, but these are macro trends which are best observed in macro-sensitive instruments such as futures on global markets, be they country-level equity indices, government bonds or the largest of the world’s commodities. These are the traditional fayre of CTA trend-followers. What are now called ‘non-traditional’ or ‘alternative market’ trend-followers generally boast a wider range of price drivers and better diversification through trading a broad range of typically over-the-counter (‘OTC’) markets such as emerging market interest-rate swaps or European hydro-electric power markets.

When trends are concentrated in certain markets at a given point in time, it stands to reason that the more concentrated the trend-follower is in these markets, the better performance is likely to be at that time. And this is the case at the moment; traditional trend-following (futures markets) has broadly outperformed non-traditional trend-following (mostly OTC markets).

3.2.  Traditional Trend Works Better in Crisis Periods

In the long term, we believe diversification is the key feature in designing robust trend- following strategies. Figure 2 shows how an alternative markets trend-following strategy – with its greater diversification – outperforms a simulated futures/FX trend one. This is particularly true in the non-crisis periods. However, it is not the case for crisis periods such as the Global Financial Crisis of 2008 and the coronacrisis of 2020.

Figure 2. Alternative Market Versus Traditional Trend-Following: Performance in Crisis and Non-Crisis Periods

Source: Man Group, Bloomberg, Société Générale, BarclayHedge; between 1 September 2005 and 31 May 2022.

Simulated past performance is not indicative of future results. Returns may increase or decrease as a result of currency fluctuations.Please see the important information linked at the end of this document for additional information on hypothetical results.

Note: Data normalised to same volatility as world stocks (14%). World stocks represented by MSCI World Net Total Return Index Hedged USD. Alternative trend results are from a strategy which trades predominantly OTC markets. Futures/FX trend results are based on strategies trading predominantly futures/FX markets.

Can it be true that diversification is less effective in a crisis?

Can it be true that diversification is less effective in a crisis? Again, we would fall back on intuition to explain this. ‘Crisis’ typically relates to developed markets, most often equities. News of a crisis in European hydro-electricity rarely makes the headlines or ripples through financial markets. In this case, we believe it stands to reason that global futures markets should be the instruments of choice for a trend-follower if an investor seeks a crisis hedge.

3.3.  Trend-Followers Make Money… in Down Markets… From Short Bonds?

It has long been alleged that trend-following’s ‘crisis alpha’ credentials stem from long bond positions. This is understandable:

  1. The longest-lived trend-following managers have been around for four decades, during which time yields have been in secular decline, so trend-followers should have been mostly long bonds;
  2. In a crisis, for which we infer a crisis in risk assets, there is often a flight-to-quality of bonds – particularly high quality government bonds.

Using simulations with data back to 1970s – the last time we saw sustained inflation and rising rates – we showed that ‘crisis alpha’ applied to bonds as well as equities.

The Barclays Capital Global-Aggregate Bond index (USD hedged) has lost 7.7% in the first five months of the year, and is in a drawdown of around 9%. This sounds bad, but in the context of history – looking back three decades – this is almost twice as bad as the 1995 drawdown, and around three times historic volatility. In fact, 2022 represents a bond rout and gives us the first ‘real world’ opportunity to see whether our ‘crisis alpha’ research holds in reality.

The results for a trend-following portfolio consisting of both futures/FX and alternative markets are shown in Figure 3. What we find is that bond attributions are positive in crisis periods, and result from long bond exposure. The notable exception is 2022, where a positive bond attribution has resulted from short bond exposure in aggregate.

Figure 3. Gross Bond Attribution and Net Bond Exposure During Crises

Source: Man Group database.

Simulated past performance is not indicative of future results. Returns may increase or decrease as a result of currency fluctuations. Please see the important information linked at the end of this document for additional information on hypothetical  results.

We make two points: (1) trend-following is an all-weather inflation performer; and (2) it is a strategy for volatile environments.

4.  The Outlook for Trend

History is one thing, but to quote the first rule of Italian driving: “What’s-a behind me is not important.”2 What is ahead is what matters, and for this we lean on an article written by our colleagues at Man Group: ‘Inflation Can Go Down as Well as Up’. We make two points: (1) trend-following is an all-weather inflation performer; and (2) it is a strategy for volatile environments.

4.1.  Trend-Following: An All-Weather Inflation Performer

Figure 4 reproduces a chart from Inflation Can Go Down as Well as Up, showing that trend-following is not only a robust performer in inflationary periods in general, but also in the last six months of the episode, as well as in the 6- and 12-month timeframes following inflation’s peak.

Figure 4. Annualised Real Returns for Inflation Regimes (1926 to Present)

Source: Equities are the S&P 500 using Professor Shiller’s data. UST10 is from GFD. 60/40 is the monthly rebalanced 60% equity, 40% bonds portfolio. Commodities are proxied by an equal weight portfolio of all futures contracts as they appear through history. From 1926 to 1946 this is based off work done by AQR. From 1946 we use returns from the Man AHL database. Styles are the Fama-French portfolios (Mom., Value (HML) and Size (SMB)), and AQR (QMJ) for Quality. TIPS prior to 1997 based off a backcast by William Marshall at Goldman Sachs, otherwise Bloomberg. HY portfolio constructed by the Man DNA team, using data provided by Morgan Stanley; as of 28 April 2022.

Figure 4 also tells us that by using a trend-following strategy, we don’t need to be able to predict when an inflationary period may peak or end. Intuitively, this is because given sufficient time, trend-following strategies are likely to adopt the market direction, whether it be long commodities, short bonds and equities in inflationary periods or the other way around after inflationary peaks.

At its heart, trend- following is an intuitive strategy; it should do well when markets move a lot, as they often do in inflationary environments

4.2. Trend-Following: A Strategy for Volatile Environments

In Inflation Can Go Down as Well as Up, the authors conclude their note with “Higher inflation = more volatility. We should all get used to it.” Whether this is a recommendation or a threat is in the eye of the reader.
Trend-following’s ‘long volatility’ characteristics have been noted for several decades (see for example Fung and Hsieh, 1997), and will be the subject of a future note, so we will not dwell on this here. From a trend-follower’s point of view, however, it translates the conclusion from the above article as an opportunity.

2. Raul Julia as ‘Franco’ in The Gumball Rally (1976) www.youtube.com/watch?v=hVp7FbLpVSU

5.  Conclusion

We have used the words ‘intuitive’ or derivative thereof three times – hopefully a surprise to our reader who has persevered to get here since we don’t want to labour the point. But it is important.

At its heart, trend-following is an intuitive strategy; it should do well when markets move a lot, as they often do in inflationary environments. History shows that trend- following can potentially do well after a period of inflation too.

Further, if an investor wants to tune a trend-following strategy to a crisis, and that crisis is in macro-economies, we believe instruments that are sensitive to the macro- economy should be used. If the aim is to upset a systematic trader, describe their strategies as ‘black box’. The term suggests mystery, or some kind of magic. In our view, the robust and intuitive performance of trend-following so far in 2022 has been anything but.

Bibliography

Neville, H., T. Draaisma, B. Funnell, C. Harvey, and O. Van Hemert, “The Best Strategies For Inflationary Times”, March 2021. Available at SSRN: https://papers.ssrn. com/sol3/papers.cfm?abstract_id=3813202

Harvey, C. R., E. Hoyle, S. Rattray, M. Sargaison, D. Taylor, and O. Van Hemert “The Best of Strategies for the Worst of Times: Can Portfolios Be Crisis Proofed?”. July 2019 Journal of Portfolio Management, Volume 45, number 5. Available at https://www.man.com/maninstitute/best-of-strategies-for-the-worst-of-times

Hamill, C., S. Rattray, and O. Van Hemert, “Trend Following: Equity and Bond Crisis Alpha” (August 30, 2016). Available at SSRN: https://ssrn.com/abstract=2831926

Draaisma, T., and H. Neville (2022); “Inflation can go down as well as up”; https://www.man.com/maninstitute/road-ahead-inflation-up-down

Fung, W., and D. Hsieh, “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds”, The Review of Financial Sturides, 2, 275-302.

We have written extensively about trend-following’s persuasive credentials during inflationary periods and equity crises. As such, with inflation’s return and weak equity markets this year, it is perhaps not too big a surprise that trends are back in vogue.

Author: Graham Robertson, DPhil 
Graham Robertson is a partner and Head of Client Portfolio Management at Man AHL and is a member of the investment and management committees. He has overall responsibility for client communication across Man AHL’s range of quantitative strategies. Prior to joining Man AHL in 2011, Graham developed capital structure arbitrage strategies at KBC Alternative Investment Management and equity derivative relative value models for Vicis Capital. He started his career at Credit Suisse in fixed income before moving to Commerzbank, where he established the relative value team and subsequently became Head of Credit Strategy. Graham holds a DPhil from the University of Oxford in Seismology and a BSc in Geophysics from the University of Edinburgh.

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The Anatomy Of The Sell-Off

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The Anatomy of the Sell-Off

GLADIUS SOLUTIONS - VOLATILITY VIEWS | Q3 2022

The manner and dynamics which a market exhibits as it moves to the downside can be one of the most insightful pieces of information for investment professionals. Selloffs come in all shapes and sizes and while many can feel traumatic, they often exhibit vastly different characteristics. As volatility professionals, we are equally focused on both the speed and magnitude of market movement during selloff periods. When stocks fall with chaotic volatility far above the expectations of the market, dramatic increases in risk parameters like implied volatility and what we call “implied volatility skew” occur. On the other hand, when markets fall in a rational and orderly fashion, we typically see those risk parameters fall and underperform expectations. Many times, it can feel like an incongruous relationship between the level of angst felt by investors and the actual manifestation of a market correction. This was exactly the case for the first half of this year.

It’s been hard to find investors who are bullish during 2022. The macro backdrop feels particularly poor with soaring out of control inflation, quantitative tightening looming (something we think will be a strong catalyst for market volatility in the second half of the year), a potential recession on the horizon, and of course the Russian invasion of Ukraine. Since the start of the year, global equity markets have been under pressure. The SP500 has fallen 20.6% YTD (as of 6/30/22) and its average realized volatility, a measure of the speed at which it moves, has almost doubled – from 13.8 to 24.9. Interestingly, other equity capital markets have exhibited a remarkable correlation between their rise in realized volatility and their place in the global tightening cycle. The US has experienced the largest percentage rise in equity volatility, 80%, followed by Europe, 50%, and lastly Japan, still in full accommodative monetary policy mode, at 20%.

Despite the large rise in equity realized volatility in the SP500, downside equity options proved to be highly overpriced during the first half of the year. Here is a graph of what we call two-month implied skew, illustrated as the implied volatility differential between the 25 delta Put and the 25 delta Call, expressed as a fraction of the at the money volatility:

2 Month Implied Skew Graph

Source: Gladius proprietary and Bloomberg

The graph measures the difference in implied volatility between downside puts and upside options. We select two-month options as barometer because it’s a commonly used maturity for liquid hedges while being free of any effects arising from longer dated structured products. We can see the level of implied skew collapsed during the market selloff in the first half to multi-year lows. This meant that the implied volatility of puts relative to upside calls moved sharply lower despite the markets falling over 20%.

Why did this occur? The most likely reason in our view is that following so many years of strong equity gains, the violence of the drop in equity markets, other than a few days, was simply not sufficient to induce any panic among equity investors. The selloff was quite organized in nature and seemed to promote an almost accepted indifference from long equity holders.

The movements we witnessed in equity implied volatilities mean that any strategies which were net sellers of tail risk have had a very good year so far. As an example, here is a graph of a systematic short-tail risk strategy. This strategy extracts the implied volatility skew risk premium by selling downside puts and buying upside calls in a delta neutral (market neutral) fashion, and we can see the performance of the strategy for H1 2022 was the best period over the last several years. That fact speaks to the almost unprecedented lack of reactivity of downside options on the SP500. The muted behavior of out of the money puts on the SP500 was a significant deviation well outside normal expectations.

Short Skew Performance Graph

Source: Gladius proprietary and Bloomberg

Looking Ahead:

If one had been a prudent equity investor during H1 and utilized short-dated options as part of a hedging program, there was little tangible benefit in doing so this year. Here is a graph of a systematic strategy which monthly buys 5% out of the money puts while holding SP500 long futures:

Performance SPX vs PPUT

Source: Gladius proprietary and Bloomberg

As we can see, the returns are almost identical to those of the outright SP500 index meaning there was little added value to hedging so far this year. The salient question is whether this is expected to continue for the second half of the year.

We are not venturing whether a second major market correction will occur in 2022, but we postulate that if one occurs, it’s likely to be significantly different than what we saw in H1. We believe the next time the market breaks the previous lows there will be a much higher degree of violence and turmoil complete with significantly higher correlation and volatility. Our reasons for this are based on a couple of thoughts:

  • When Quantitative Tightening fully kicks offs, the liquidity removal from the market can cause a drastic fragmentation of risk capacity which should serve as a strong catalyst for We have decades of accommodative policy to unwind.
  • The equity risk premium has not really moved significantly at all since the start of the year even with the backdrop of falling earnings. We think this has room to expand to levels more commensurate with a meaningful market correction.
  • Structural dampening effects on longer dated implied volatility are likely to be lower given the slowdown of issuance in retail products
  • Traditional rebalancing programs which normally provide a strong bid to equities in falling markets may not do so this time on account of inflation-driven fixed income movements and new asset allocation parameters (more on this in a following piece).
  • Within the equity volatility world, short risk strategies like dispersion (short implied-correlation) and short index implied skew (short tail-risk) enjoyed near unprecedented levels of success during the first half of the year. We don’t think this is likely to repeat in the case of another market downturn.

We therefore advocate a highly vigilant stance and even though hedging and convexity programs have not been necessarily fruitful so far this year, we believe they have a strong role to play in the upcoming months. The significant collapse of implied volatility on SP500 skew presents a unique opportunity for those investors seeking to protect their portfolios and we believe it should be availed.

If you have any comments or questions please let us know. We would be delighted to have call to discuss further.

Sincerely,

The Gladius Team | [email protected]

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The Benefits Of Non-Correlated Alpha

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The Benefits of Non‑Correlated Alpha

In Q1 2022, 60/40 portfolios suffered as both stocks and bonds sold off and the power of bonds as a diversifier (and, accordingly, a means of reducing portfolio volatility) deteriorated. Meanwhile, record inflation serves to exacerbate the issue and erode real returns. These challenges indicate an increased need for alternatives that offer both diversification to equities and bonds as well as compelling long-term returns.

IN 2022, MANY INVESTORS FACE SEVERAL KEY CHALLENGES

1) Diminishing Returns of a 60/40 Portfolio
In Q1, both equities and bonds posted negative returns. While the trajectory for equities is marked with uncertainty, bond return potential has diminished as historically low yields translate to lower coupon payments, negative real yields, and less scope for price appreciation.

2) Positive Stock/Bond Correlation
Equity/bond relationships are not static, and there have been extended periods of positive stock/bond correlation. Today, historically low yields mean that the protective character of bonds is in jeopardy and investors may see positive correlations between stocks and bonds.

3) Volatility and Market Uncertainty
Given geopolitical developments and macro imbalances, markets have exhibited heightened volatility in recent months alongside an increased potential for market shocks. Should the equity hedging benefits of bonds diminish, the ability to manage portfolio volatility will become more challenging.

4) Inflation Sensitivity
CPI reached a 40-year high of 8.5% in March. Elevated inflation presents a significant risk to stock/bond portfolios in terms of asset valuation, erosion of real returns, and positive correlation. When inflation rises, real yields decline alongside the market price of bonds.
Inflation can also weigh on stocks when combined with hawkish monetary policy, as we saw in the 1970s, potentially leading to simultaneous losses in stocks and bonds and positive correlations.

THE ROLE OF ALTERNATIVES

1) ENHANCE RETURNS
Ideally, investors should seek alternative strategies with positive long-term return and low correlation characteristics, which offer the potential to enhance the risk-adjusted returns of a broader investment portfolio.

2) PROVIDE DIVERSIFICATION
Many alternatives have low correlation to stocks and bonds, with the ability to profit in both rising and falling markets with no inherent bias and the potential to provide equity crisis returns.

3) REDUCE VOLATILITY
Diversification properties result in the potential to reduce the overall volatility and drawdowns of a broader investment portfolio. Active risk management approaches can help navigate market volatility and changing market dynamics.

4) INFLATION AGNOSTIC
Many alternatives can perform well in inflationary or noninflationary regimes and can capitalize on increasing commodity prices during inflationary periods.

WHERE CAN INVESTORS TURN TO FOR DIVERSIFICATION? NOT ALL ALTERNATIVES ARE CREATED EQUAL

Many investors seek diversification through alternative strategies. However, not all alternatives provide the desired portfolio
diversification benefits. Diversification benefits vary significantly across styles, and many strategies have positive correlation during equity down markets.

Correlation of Alternatives to Equities
Based on Monthly Data from January 1990 through March 2022*

Q1 2022 CASE STUDY

In Q1 2022, markets experienced a trifecta of a selloff in equity and bond markets, heightened market volatility, and elevated inflation, making it a difficult start to the year for many investors. From an asset allocation perspective, investors should consider allocations to alternative strategies that, ideally, have positive long-term return potential and diversifying characteristics during difficult equity environments. Importantly, diversification should be a constant rather than a reaction to short-term market conditions.

*Alternative strategies above are represented by their respective HFRI indices. Data is presented from inception in January 1990 with the exception of the Credit and Trend Following indices, which are available from January 2008. For purposes of this presentation, we show broad hedge fund indices as categorized by HFRI, but our selection is not meant to be an exhaustive representation of all potential alternatives. Other investment strategies, including private equity, real estate, and venture capital, among others, are often considered to be diversifiers to traditional stock and bond portfolios but are not shown here due to limitations on the availability of a representative index or other constraints or considerations.

LONG-TERM BENEFITS

Market conditions continually change, and the best way to construct a portfolio resilient to changing market regimes is through proper diversification. Allocating to strategies that have low correlation to equities and bonds can be a valuable portfolio construction tool with the potential to lower the volatility and soften the drawdowns of an overall portfolio while adding to returns over the long run. These strategies are meant to complement – rather than compete with – traditional investments. And while it is unreasonable to expect any strategy to perform well at every discrete point in time, holding the diversifying alternatives as a long-term, strategic allocation in a diversified investment portfolio offers the potential for significant benefits.
Below, we show the impact of allocating to macro and trend-following strategies, which are widely regarded as effective diversifiers within an investment portfolio.

THE BOTTOM LINE

  • In the current investment landscape, there is a need for alternatives that can offer both positive returns and diversification to both equities and bonds.
  • Diversifying strategies such as macro and trend following offer significant long-term return and diversification benefits, with the flexibility to capture moves across a variety of market environments.
  • Allocating to diversifying strategies as a strategic, long-term investment within a diversified portfolio can potentially enhance risk-adjusted returns and reduce overall volatility and drawdowns.

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IMPORTANT DISCLOSURE

LEGAL DISCLAIMER

Source of data: Graham Capital Management (“Graham”), unless otherwise stated

This document is neither an offer to sell nor a solicitation of any offer to buy shares in any fund managed by Graham and should not be relied on in making any investment decision. Any offering is made only pursuant to the relevant prospectus, together with the current financial statements of the relevant fund and the relevant subscription documents all of which must be read in their entirety. No offer to purchase shares will be made or accepted prior to receipt by the offeree of these documents and the completion of all appropriate documentation. The shares have not and will not be registered for sale, and there will be no public offering of the shares. No offer to sell (or solicitation of an offer to buy) will be made in any jurisdiction in which such offer or solicitation would be unlawful. No representation is given that any statements made in this document are correct or that objectives will be achieved. This document may contain opinions of Graham and such opinions are subject to change without notice. Information provided about positions, if any, and attributable performance is intended to provide a balanced commentary, with examples of both profitable and loss-making positions, however this cannot be guaranteed.

It should not be assumed that investments that are described herein will be profitable. Nothing described herein is intended to imply that an investment in the fund is safe, conservative, risk free or risk averse. An investment in funds managed by Graham entails substantial risks and a prospective investor should carefully consider the summary of risk factors included in the Private Offering Memorandum entitled “Risk Factors” in determining whether an investment in the Fund is suitable. This investment does not consider the specific investment objective, financial situation or particular needs of any investor and an investment in the funds managed by Graham is not suitable for all investors. Prospective investors should not rely upon this document for tax, accounting or legal advice. Prospective investors should consult their own tax, legal accounting or other advisors about the issues discussed herein. Investors are also reminded that past performance should not be seen as an indication of future performance and that they might not get back the amount that they originally invested. The price of shares of the funds managed by Graham can go down as well as up and be affected by changes in rates of exchange. No recommendation is made positive or otherwise regarding individual securities mentioned herein.

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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
DISCLOSURES AT THE END OF THIS DOCUMENT ARE AN INTEGRAL PART OF THIS DOCUMENT.

The Benefits Of Non-Correlated Alpha Read More »

Volatility Premiums Are Currently At The All-Time Highs

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Volatility Premiums Are Currently at the All-Time Highs

In the chart below we show the 15-year percentile of various premiums across several asset classes (as of August 2021). Earnings, bond and credit yields are at their 15-year lows. Equity volatility premiums (IV-RV, Term Structure, Skew), on the other hand, are in the 90th percentile. This may be the right time to take a closer look at the equity volatility premiums and their added value in a balanced portfolio.

volatility premiums are currently at the all-time highs

Volatility Premiums Are Currently At The All-Time Highs Read More »

Risk Perception Has Changed Post-COVID Market Crash

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Risk Perception has Changed Post-COVID Market Crash

Markets are well on their way to posting another record year and the Covid crash now looks like a blip, albeit a big one, in the unstoppable rally. But is there more to this than meets the eye? We plotted the worst S&P500 daily returns from January to August 2019 versus the daily changes in the VIX and compared this to the data from the same period in 2021. An elevated nervousness in the post-Covid era is clearly observable – the jumps in the VIX are higher on the days when the S&P500 is down. Some of the likely reasons for this change in the risk perception are not only related to the lingering memory of the Covid crash, but also due to the increasing concerns related to the withdrawal of the supply of liquidity and increasingly stretched equity valuations.

Change in risk perception?

Risk Perception Has Changed Post-COVID Market Crash Read More »

Are S&P 500 Straddle Trades As Cheap As They Seem?

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Are S&P 500 straddle trades as cheap as they seem?

Several commentators, including Cornerstone, are highlighting how cheaply investors can now put on one-week straddle trades, in which they buy 1-week at-the-money put and call options to position for a spot move in either direction. Given that the S&P 500’s five-day high-low range has recently been above 4%, as the second chart shows, a straddle that pays if the market moves more than 1.1% in either direction over a five-day period looks like a decent proposition. However, context matters here. This is a big week for S&P 500 quarterlies and the data show that the average move in the index has not been large during recent earnings weeks. On paper, then, the straddle may not be as cheap as it looks. However, for investors who have a high conviction viewpoint on earnings news, macro developments, or even the unfolding story of the Delta variant, positioning for these via a straddle is relatively inexpensive, especially if they are prepared to trade the intraday moves.

The market commentary contained herein represents the subjective views of certain Capstone personnel and does not necessarily reflect the collective view of Capstone Investment Advisors, LLC (“Capstone”), or the investment strategy of any particular Capstone fund or account. Such views may be subject to change without notice. You should not rely on the information discussed herein in making any investment decision. Not investment research.

The market data highlighted or discussed in this document has been selected to illustrate Capstone’s investment approach and/or market outlook and is not intended to represent fund performance or be an indicator for how funds have performed or may perform in the future. Each illustration discussed in this document has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria.

This document is not an offer to sell or the solicitation of any offer to buy securities. The content herein is based upon information we deem reliable but there is no guarantee as to its reliability, which may alter some or all of the conclusions contained herein. This document may not be reproduced or distributed without the express written permission of Capstone.

Investment and Trading Risks: Capstone serves as the investment manager to a number of investment vehicles that pursue alternative investment strategies. Investments in alternative investments are speculative and involve a high degree of risk. Alternative investments may exhibit high volatility, and investors may lose all or substantially all of their investment. Investments in illiquid assets and foreign markets and the use of short sales, options, leverage, futures, swaps, and other derivative instruments may create special risks and substantially increase the impact and likelihood of adverse price movements. Interests in alternative investment funds are subject to limitations on transferability and are illiquid, and no secondary market for interests typically exists or is likely to develop. The investment and trading risks associated with each vehicle’s investment instruments and techniques are described in detail in the vehicle’s offering documents. Capstone’s investment vehicles are also subject to counter-party risk; illiquidity risks; ability to acquire assets at favorable spreads and spread-widening risks; hedging risks; and custodial risks.  Alternative investment funds are typically not registered with securities regulators and are therefore generally subject to little or no regulatory oversight. Performance compensation may create an incentive to make riskier or more speculative investments. Alternative investment funds typically charge higher fees than other types of investments, which can offset trading profits, if any. There can be no assurance that any alternative investment fund will achieve its investment objectives.

Securities highlighted or discussed in this document have been selected to illustrate Capstone’s investment approach and/or market outlook and are not intended to represent the Funds’ performance or be an indicator for how the Funds have performed or may perform in the future. Each security discussed in this letter has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small percentage of a Fund’s holdings. The Funds’ portfolios are actively managed and securities discussed in this document may or may not be held in such portfolios at any given time. Nothing in this document shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this document.

Capstone does not recommend any trades as we are not a broker dealer. The examples above are presented for illustrative purposes only, showing examples of the type of trades we monitor. There is no guarantee that Capstone will be able to identify and execute similar trades or successfully implement the strategy.

The market observation(s) has/have been provided for discussion purposes only and describe(s) investments that may be made by Capstone. There can be no assurance that the investment opportunities similar to those described in the market observation will become available to the Capstone. Any specific investments referenced in this document were selected for the purpose of describing the investment processes and analyses used by Capstone to evaluate such investments.

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References to Indices: The S&P 500® is regarded as a gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 companies and captures approximately 80% coverage of available market capitalization.

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Are S&P 500 Straddle Trades As Cheap As They Seem? Read More »

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Harold de Boer

Managing Director, Head of R&D

Transtrend

Harold is the architect of Transtrend’s Diversified Trend Program, responsible for R&D, portfolio management and trading. Harold was born and raised on a dairy farm in Drenthe. And from a young age, he has been intrigued by linking mathematics to the real world around us.

He graduated in 1990 with a Master’s degree in Applied Mathematics from the University of Twente in the Netherlands. In the final phase of his studies, while working on the project that would later become Transtrend, he became fascinated by the concept of leptokurtosis — or ‘fat tails’ — in probability distributions, a topic which has inspired him throughout his career.  

Harold’s approach to markets is best described as a combination of a farmer’s common sense and mathematics, never losing sight of the underlying fundamentals.