Former MIT physicist behind Blackheath Volatility Arbitrage Strategy and Risk Management

I think they likely view the strategy as an attempt to harvest the variance risk premium. I know there is a lot of debate about various risk premia in the markets (variance, skew, etc.), but in this case I think they view the ATM gamma to be consistently rich in price. Yes, you are right. In skewed markets, they will give up part of their perceived edge in buying the wings, but in certain cases they can structure a butterfly such that there is still a positive expected P&L.

They then have a position which will be short gamma (at least initially). Many traders hedge the deltas arising from short gammas with stop losses on the underlying.

Hope this helps.
 
Same maturity? Thats same profile as a butterfly. you could sell near term atm straddles and buy slightly more further out strangles
 
Pretty sure that fund was shut down last year (the volatility fund, not Blackheath). They would be short vol (presumably) across a variety of different markets and get caught on some of the larger trend moves. That's what I recall from reading their monthly commentary blogs, not fact. The fund isn't listed on the Blackheath site anymore though.


Checkout LJM Partners, they continue to have good returns from, what I think is, a pretty vanilla short vola fund. Besides that 2008 drawdown of course.
 
Last edited:
shooter said:
Pretty sure that fund was shut down last year (the volatility fund, not Blackheath). They would be short vol (presumably) across a variety of different markets and get caught on some of the larger trend moves. That's what I recall from reading their monthly commentary blogs, not fact. The fund isn't listed on the Blackheath site anymore though.


Checkout LJM Partners, they continue to have good returns from, what I think is, a pretty vanilla short vola fund. Besides that 2008 drawdown of course.
More...

Looks like they had 3 bad years of returns with a disasterous 2015.

http://onlyvix.blogspot.com/2015/10/some-vol-funds-news.html
 
Short volatility strategies work for a while, until they don't. LTCM was short volatility on a variety of assets around the globe... Obviously didn't work out so well and they were "the smartest guys in the room". Should be fair warning against strategies that are exclusively short volatility.
 
I can't see how it's a viable operation. Only 60mm aum at its peak and it seems like they have a lot of overhead. I will be surprised if the main guy is earning anything after expenses.
 
Short ATM straddles with some far OTM protection and "hedging with the underlying" via stop loss orders isn't exactly rocket science, nor is it even new. Should be fun when VIX is 30+ (which BTW was never even mentioned as a hedging vehicle either).

Also, I don't know what all the other "behavioral finance" mumbo-jumbo was about, seems entirely irrelevant.
 
Last edited:
You must log in or register to reply here.
Back
Top