IMFC Makes Volatility an Even Better Friend of Managed Futures?

The general assumption in managed futures is that volatility is a friend to performance, but as 2011 showed us, this won’t always be the case- especially if volatility is choppy and associated with dramatic risk on/risk off moves. In some ways, they’re more “frenemies” than anything else.

Today on a regular ongoing due diligence call with one  of our recommended managers, Roland Austrup of Integrated Managed Futures Corp (IMFC), who we’ve been working with since 2009, we learned that he has decided to abide by the whole “keep your friends close, and your enemies closer” routine, incorporating the trade of VIX futures into his trading strategy. As he explained in a recent piece of research:

Since its introduction in 1993, the CBOE Volatility Index (VIX) has become a preeminent barometer for measuring broad equity market volatility. VIX measures the market expectation of 30-day volatility implied by prices of CBOE-listed S&P 500 (SPX) options… VIX itself is not investable, the exchange-listed VIX futures and options contracts have served as a surrogate for exposure to the non-tradable index. In fact, VIX contracts are now the most liquid way globally to trade short-term implied volatility despite their short trading history.

As a Commodity Trading Advisor (CTA) constantly looking for more alpha-generating strategies, VIX futures has appealed to us as an alpha source which is uncorrelated to the existing markets we trade.

The strategy elements in place are definitely fascinating, but the important thing for us was the major emphasis IMFC is placing on the risk management element of it. In particular, the breakdown of the risks associated with trading VIX futures was notably thorough.

Vega: Vega measures the sensitivity to volatility. Since trading VIX futures involves taking directional bets on the volatility, having a VIX futures position will be equivalent to taking the Vega risk.

Theta: Theta is the sensitivity of the derivative’s value to the passage of time (i.e. time decay). The VIX futures term structure priced in the possibility of a future volatility spikes. However, as time approaches to maturity, there is smaller probability of this happening and hence the value of VIX futures will decline. The decline in contract value reflects the time decay for VIX futures. In fact, Theta or time decay is the source of returns for systematically selling VIX futures in “contango”.

Delta & Gamma: Delta and Gamma are respectively the first and second derivatives of the option value with respect to the underlying price. Instead of delta-hedging a basket of options to achieve a pure volatility trade, VIX index is actually calculated from some mathematical equations without holding any options. Therefore, investors do not have to worry about any delta or gamma risk involved in trading the VIX futures.

Interesting stuff. We’ll be watching the trading closely, and look forward to getting a feel for how this new addition to the strategy impacts the performance of the IMFC program.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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