Dude, I get that this is ET but did you actually read what I wrote beyond scanning for the key words? They were short calls on
realized variance, not calls on stocks or indices. Call on realized variance is similar to a call on VIX except instead of expiring based on the VIX settlement price it expires based on the realized volatility:
Code:
call_realized_variance = max(0, realized_volatility^2 - variance_strike^2)/(2*variance_strike)
vs
Code:
call_on_vix = max(0, vix_soq - vix_strike)
So when realized volatility goes up, calls on realized variance make money very very quickly because of the quadratic nature (or lose money very quickly). Because of that feature they are very expensive even when struck far out of the money (the synthetic form they were short were struck around 2.5 times the expected variance levels which is around 35-40%). Since the GFC, a lot of people felt that it's a great trade to sell these structures and protect themselves with VIX calls, including these guys.
https://us.allianzgi.com/en-us/stra...ments/structured-alpha-march-2020-performance link to their own internal review. Risk management had three structures. Strategy one just keep rolling down. Doesn't work well when market falls off a cliff. Strategy 2 buy protective puts. apparently not enough. Strategy 3 - company wide risk management team manages systemic rick.
Yes, yes I found the same thing
https://us.allianzgi.com/en-us/inst...ments/structured-alpha-march-2020-performance after much digging. Funny that I couldn't find any recent prospectuses of the Structured Alpha 1000 and Structured Alpha 1000 plus funds. The only 2 prospectuses that I found were only of the Structured Alpha Fund that they filed with SEC from 2012
https://www.sec.gov/Archives/edgar/data/1423227/000095012312013981/y30087a1e497.htm#Y30087101, and another one in 2014
https://www.sec.gov/Archives/edgar/data/1423227/000119312514436664/d832501d497k.htm after they changed the entire investment strategy and changed the name of the fund altogether to Structured Return Fund.
According to the prospectus filed in 2012, it looks like their strategy with the Structured Alpha fund were most likely doing ratio spreads or bull/bear spreads on SPX index options, Russell 2000 Index and NASDAQ 100 probably mostly with SPX 500 index options since it's the most liquid out of all three that are 1 month to 2 months 1/2 out and then hedge with VIX-based ETF/ETN which I assume would be VXX, UVXY and etc.?
So if they are hedging with VIX-based ETN/ETF then that's not the perfect hedge with totally mismatched delta, which is what I suspected. I don't understand why didn't they hedge with SPY options? And in fact if they are doing spreads, the other leg of the spread is already the hedge, they absolutely didn't need to hedge with VIX-based ETN/ETF. The investment in the VIX-based ETN/ETF was really not a hedge but additional investment that must've been money-losing for them during all the time when the market volatility is low. But then if they had actually stuck with this strategy, during the Feb. and March Covid-19 period, their (I assume) long in VIX-based ETN/ETF would've made them huge money and might've offset some losses if they had invested enough in them. But they probably abandoned this strategy in 2014 because they were losing too much money by investing in VXX or UVXY. Bad move. Taleb would've had a field day with them.
From the Prospectus in 2014, they completely changed their strategy to investing in SPY or investing directly in the 500 stocks in the S & P 500 index outright and writing ITM SPX-based calls for further profit and then hedge with box spread. Of course they realize that shorting calls have unlimited loss potential when the market is doing very well and provides you only very limited offset to losses when s*** hits the fan? So maybe this is why they abandoned this strategy and instead replaced it with shorting calls on VXX which I am sure they realize itself is really a 6-degree derivative which turning around, when s*** hits the fan, they face unlimited loss except now at 3 times the speed??!! And they think their puny far OTM SPX short-term puts or their 45-days away long puts were going to save them? Another thing that I suspected, completely inadequate delta.
All in all, I see what really killed them is really greed and incompetence and reckless disregard for their investors' financial wellbeing. They were replacing strategies with more and more and more volatile versions which were all short vol. with virtually no risk management to match. It's ridiculous that they describe their "first line of defense" as restructuring options which is really Karen the Supertrader move aka sweeping losses under the rug until they can be recovered later LOL, and their far OTM SPX put spreads, mind you, not even VIX options but regular index options and not even pure SPX put options, but put spreads when they were writing calls on VXX? And then their second line of defense is making sure the other party can pay up, "counterparty risk". LOL
Oh gawd, they deserve to be sued. I just feel so sorry for those investors. Many of them are pension and retirement funds. These are money for people who have worked all their lives and are are now dependent on them to live out the rest of their lives. How can they invest those money in VIX-based products and worse derivatives on VIX-based products and with no effective hedging mechanisms??!!
