Amid horror stories of crashing vol-selling funds and entire VIX-linked products getting decimated, like the now infamous XIV, an occasional success story emerges. Take Global Sigma: the fund, which is run by CIO Hanming Rao formerly a stat arb quant, and macro futures and options trader at Millennium and SAC, has a Vol Arb strategy that is absolutely crushing it at a time when most of its vol-selling peers are getting hammered.
The reason: GS Hedge is a systematic long VIX directional trading strategy. Here is its technical description:
The strategy’s prediction models are informed by Global Sigma’s history as an early trader of the weekly options on the S&P500 futures contract launched by the CME in Q3 2009. The option strategy"s risk management framework has been driven by the model’s 1-day price distribution prediction forecast of VIX that was first utilized by Global Sigmain 2009.
Some more on the fund"s history: Global Sigma began trading managed accounts in late 2009. Global Sigma employs a model-driven, high turn-over approach to trading options.
Global Sigma has become one of the most active managers of the weekly expiry S&P500 options contract in the CTA industry and generally seeks to trade inefficiently priced Puts and Calls. The strategy partially hedges the portfolio’s Delta/Gamma exposures in a discretionary manner by taking positions in the S&P500 futures market and by buying under priced Puts and Calls. The average daily Delta exposure of the portfolio since inception has been -0.13, -0.23 since January 2013.
Technicals aside, what the fund does - in simple English - is simple: it is long both the VIX and long S&P futures, or as it states, "Long VIX, beta-hedged with Long S&P 500, i.e. a tail risk hedge."
Approximately 40% of the time a long VIX position is established that is beta-hedged with 6 to 10 eMini S&P500 contracts. 60% of the time, a 1-day normal price distribution is predicted and the portfolio remains 100% in cash.
What makes Global Sigma unique is that unlike other fat-tail funds who are mostly long the VIX and suffer constant theta decay in hopes of striking it rich on day when the VIX soars, this fund pair trades the VIX and the S&P with little if any day-to-day decay. Instead, what it hopes for is days like Monday when as Natixis pointed out on Tuesday, the "VIX spike corresponded to a 15% market crash", and instead the S&P dropped "only" 4%.
As a result, the otherwise unspectacular pair trade generated unprecedented returns, and as can be seen in the table below, just had its best month every, generating a 18.1% return in just the first week of February, and is now up 26.8% YTD.
Curious to learn more? Here is an Opalesque interview with Global Sigma"s founder, Hanming Rao. First some more background:
He began his career in finance in 2005 as a Quantitative Researcher at Ellington Management. From 2006 to 2009, he was a Global Macro trader at SAC Capital where he managed a exposure in global futures and OTC products including short-term OTC options on the S&P500 Index.
In early 2009 Hanming joined Millennium Partners which he left on friendly terms to set up his own firm having obtained seed capital from an X-Harvard Professor. Today, Global Sigma manages approximately $300m in two main strategies involving options and futures on the S&P500 and Treasury Bond/Note contracts.
The original program has a track record of six and a half years. Over this time, the program has generated an average annual return of 14% with a 2.6 Sharpe with 92% profitable months. The correlation to the S&P500 has been -0.04.
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