Finding Stability in Volatility
While investors continue to look for ways to create more liquidity with their hedge fund investments, the search for the same old high-frequency trading strategies, such as CTAs and global macro, carries on. However, since the beginning of the second quarter, the demand for volatility arbitrage managers has gradually increased. Investors are finding that volatility arbitrage funds can provide them with the liquidity they need while allowing them to capitalize on the market’s volatile price fluctuations.
Much of the recent interest in volatility arbitrage funds has come from funds of hedge funds. In one recent week alone, BHA saw the interest from these funds span three continents: North America, Europe, and Australia. What’s interesting is that all of these funds are actively searching for credit strategies. While the investors expect credit strategies to be less liquid, they expect volatility arbitrage funds to balance their portfolios. Because volatility arbitrage managers can make plays in several markets, including the equity and currency markets, the strategy can offer strong liquidity to investors. As has been the case for several months now, the more liquidity offered by the underlying assets in a fund, the more attractive the strategy is to the investor.
In addition to liquidity, investors have also been attracted to volatility arbitrage strategies because of their ability to hedge risk while maximizing potential return. Managers that take a nimble approach to employing the volatility arbitrage strategy can take advantage of both the long and short sides of the spectrum. A European fund of hedge funds is looking for a manager that demonstrates this concept. The firm is holding capital in reserve to allocate to such a manager in the short term. It believes that managers that hold only long volatility positions are not able to provide long-term value. The firm places heavy emphasis on the fund manager’s track record in the strategy, which is much more important than the asset size of the fund.
Volatility arbitrage funds serve as an attractive investment option for hedge fund investors due to the funds’ underlying liquidity and ability to maintain a strong risk/return ratio. Interest in this strategy is beginning to spread slowly from funds of funds to family offices, wealth advisors, and private banks, and should remain popular during the next several months.