Bailey McCann, Opalesque New York for New Managers: While many volatility traders were caught out with directional bets in 2018, one fund managed to stay above the fray and end the year positively. Pearl Capital Advisors Hedged VIX program ended December up +1.00%, net of fees. The program was up +14.85% for 2018, according to performance data obtained by Opalesque. Pearl Capital Advisors is the independent investment arm of a California-based family office and takes a relative value approach to trading VIX. The strategy takes advantage of mispriced risk, with the goal of monetizing market moves. Timothy Jacobson, Managing Partner at Pearl Capital Advisors worked on developing the fund after recognizing the need for a strategy that would be uncorrelated to the broader market and uncorrelated to CTAs. The strategy can work alongside a basket of CTAs for example, adding diversification. Since the program's inception in October of 2015, it has expressed a -0.25 correlation to the S&P 500. According to Jacobson, the program also avoids some of the pitfalls of long/short volatility trading. "For directional traders, when volatility goes from point A to point B and back to point A, it's going to be hard for them to monetize that kind of move," he tells Opalesque New Managers. "From a relative value perspective, because of how we approach the market, there are ways for us to mo...................... "Just have these chapters - not a subscriber"
"Found a more complete version" Bailey McCann, Opalesque New York for New Managers: While many volatility traders were caught out with directional bets in 2018, one fund managed to stay above the fray and end the year positively. Pearl Capital Advisors Hedged VIX program ended December up +1.00%, net of fees. The program was up +14.85% for 2018, according to performance data obtained by Opalesque. Pearl Capital Advisors is the independent investment arm of a California-based family office and takes a relative value approach to trading VIX. The strategy takes advantage of mispriced risk, with the goal of monetizing market moves. Timothy Jacobson, Managing Partner at Pearl Capital Advisors worked on developing the fund after recognizing the need for a strategy that would be uncorrelated to the broader market and uncorrelated to CTAs. The strategy can work alongside a basket of CTAs for example, adding diversification. Since the program's inception in October of 2015, it has expressed a -0.25 correlation to the S&P 500. According to Jacobson, the program also avoids some of the pitfalls of long/short volatility trading. "For directional traders, when volatility goes from point A to point B and back to point A, it's going to be hard for them to monetize that kind of move," he tells Opalesque New Managers. "From a relative value perspective, because of how we approach the market, there are ways for us to monetize moves like that and create a more consistent return." Consistency of return is important with VIX strategies, which have a reputation for being expensive until volatility kicks in. Jacobson says that reputation is well earned. Pearl's program is designed to be "all-weather" such that there aren't typically long periods of negative carry until the ideal conditions for the strategy appear. The strategy takes advantage of the observable and persistent over and underpricing of risk in the market at any given time and creates trades based on those signals. "With long-volatility managers," he explains, "the question you have to ask is for the volatility move that they do capture, is it going to be enough to cover all the time they were bleeding out premium?" So far, investors seem agree that relative value might be the way to go. Fund AUM more than doubled this year and now hovers around $65 million. Jacobson says that he plans to capacity limit the strategy at somewhere between $250-500 million to keep it in line with the volume of the VIX futures market. Looking ahead to 2019, Jacobson expects that trading the VIX will be more interesting then it has been in recent memory. "There exists a long-term cyclicality in the realized volatility of the S&P 500," he says. "There also exists observable patterns in the VIX Index which may indicate transitions in volatility regimes. With those combined data points, we're expecting more extreme volatility in 2019. That does not necessarily mean equity markets will tank, it just means that we feel the data has aligned to support an extended period of higher volatility." Jacobson adds that the market could end up looking more like the mid to late 1990s when volatility was very high, but the market also rallied on the back of the tech bubble.