(Pictured: Simon Ho)
Triple3 Partners, the volatility manager which comes under the Grant Samuel Funds Management umbrella, is launching a retail fund this week following some success in the institutional market. Can volatility be seen as a separate asset class?
Volatility is well known to be an investible characteristic, although its derivatives dependency can make some investors nervous. In Australia, too, one of the early adopters, Pengana Capital, ran into difficulties a few years ago with this strategy.
According to Simon Ho, an options trader for about 20 years who set up Triple3 in 2009, the relationship between the volatility index, VIX, and the S&P 500 is “clear and it doesn’t break down”. Volatility, he says, has properties that no other asset class has.
Triple3 is a research-orientated manager. Ho actually started it as a research business, selling information to the likes of Goldman Sachs, Merrill Lynch and others, prior to going into manage money for himself and other clients.
The main fund, on which the retail offering is based, has about A$400 million invested, mostly from offshore-based investors. It is designed to deliver absolute returns but concentrates on delivering when markets go south. Unlike the Pengana fund, it is a “call/spread arrangement” which cannot lose more than 5 per cent in any one month. “It cannot blow up,” Ho says.
Triple3 trades in volatility arbitrage, trying to capture the premia in options. Ho says that there is a persistent and strong premium, evident 87 per cent of the time, which is assymetric – there tends to be a lot of buyers of options and very few sellers because, in theory, you can gain a little but lose everything through options trading.
So, to make a fund which is attractive to investors, Triple3 has devoted a lot of attention to its risk parameters and control procedures. It creates a portfolio of options and holds them to maturity. It does not do any delta hedging and only trades in the listed markets.
Andrew McKinnon, the chief executive of Grant Samuel Funds Management, the incubator which represents Triple3 and other, more mainstream, managers, volatility is worth considering as a separate asset class because of its characteristics. Given the likely environment for markets going forward, the time is right for investors to study such strategies.
Ho says Australian investors are heavily reliant on equities and low interest rates have forced them further out the yield curve searching for income-generating returns.
“We have created a structured product to make money and to be negatively correlated to equities,” he says.