Subduing the enemy: The Ins and Outs of Volatility Trading
Michael Wexler is Chief Executive Officer and Co-Founder of Maple Leaf Capital. Opalesque BACKSTAGE video Michael Wexler says Volatility is the enemy of most investment strategies, which generally do better in rising than falling markets. Veteran volatility trader Michael Wexler from Maple Leaf Capital explains how investors can actually profit from volatility by employing strategies that make more money in higher volatility than low vol environments. This is possible because the dislocation in the pricing of options between fair value and actual trading is greater at higher volatility levels. Historically, Maple Leaf's funds have historically made money in both rising and falling markets.
Opalesque TV provides an illuminating look into Steve Diggle's formerArtradis Fund Management. Mr. Diggle was one of the early entrants into the Asian hedge fund sector utilizing a "long arbitrage, long volatility" combination of strategies. Since closing Artradis, Mr. Diggle has since started and currently oversees investment for his family office under the name Vulpes Investment Management, also located in Singapore.
If you are ever in the U.S., Mr. Diggle, I would love to talk markets. Interesting excerpts and parts 2 and 3 of the interview are below.
"On the one hand, being long volatility...in times of stress that has worked incredibly well. And Asia has had a long history of periodic crisis - they seem to come along every four years... we've had just a series of crises, '97 got a lot of attention, but 2001 was very bad as well when the dotcom bubble burst, or 2000 I should say and then we had the SARs crisis, and then last year [2009] it was obviously a very significant crisis. So the long volatility aspect, and we don't care how we buy volatility, we buy convertibles, we buy warrants, we'll buy options, we'll buy variance swaps [pdf], we really don't mind as long as we think it represents good value." [italics, my own]
"The problem with that is when markets are quiet, you burn option premium, theta as it's called in the industry. You have got to find something to fill that gap because hedge fund investors don't like losing money, nor do most people. So, we focused on the other side of our proprietary trading experience which was arbitrage trading and although that is a phrase that has many different meanings to a lot of different people, when we mean 'arbitrage' we mean real arbitrage. So, closely associated entities, whether it's dual listed stock, whether it's an ADR versus the ordinary, whether it's a preferred share versus its ordinary share, a warrant versus the underlying, an index future versus its constituents, convertible bond arbitrage. Multiple strategy arbitrage in most markets in Asia you can, not rely on, but you can be confident that the underlying inefficiencies in Asia will give you arbitrage opportunities."
"We chose to come to Singapore in 2001 because we were attracted by a combination of things, all of which have remained I think significant selling points for Singapore as a hedge fund center. Firstly, there's a cost component here, which is when we first started we were very cost-conscious. We had virtually no assets under management so we had to be. Costs in Singapore are significantly lower than they are in Hong Kong and significantly lower than they are in Tokyo... they are materially lower. More importantly, the regulatory environment in Singapore continues to be extremely positive about hedge funds at a time when a lot of other jurisdictions are looking negatively at the hedge fund industry. Singapore is continued to be extremely positive about hedge funds."
