| First index to track hedge fund volatility |
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| 22/04/2007 | |
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Rumours of volatility's premature death are exaggerated. The VIX, calculated by sampling listed option volatility on the CBOE has been up 50% since the start of the year. That has made the launch of volatility trackers particularly timely. The most recent example is one which tracks the volatility sector of the hedge fund universe. Volatility strategies are typically a sub-set of relative value arbitrage. They use arbitrage, directional and market neutral strategies. The number of hedge funds that pursue volatility strategies has been growing in the last three years in spite of a decline in volatility during that period. Indeed, hedge fund capital dedicated to volatility strategies has grown by 150% in the past three years and 65% in 2006 alone, according to Hedge Fund Research. Meanwhile, the total capital managed by firms which trade volatility as an asset class is $89b. "We have identified 50 vehicles for inclusion in the universe, but the number of funds continues to increase," says Kenneth Heinz, president of HFR, which designed the hedge fund tracker. "The index is very different to the VIX which calculates listed option volatility." The HFR index captures the returns of hedge fund managers who trade volatility as an asset class. The historical return of volatility strategies have been at par with the S&P 500 and outperformed the Lehman Brothers Government/Credit Index. From January 2004 through January 2007, the index posted an annualised return of 10.87% with a standard deviation of 2.06% and a Sharpe ratio of 3.46%. By comparison, the S&P and the Lehman brothers Government/Credit Index returned 10.67% and 3.58% respectively. In addition to HFR, Merrill Lynch has launched its Equity Arbitrage Volatility Index, which seeks to synthetically replicate a strategy used by a large group of hedge funds in the sector. Separately, HFR plans to launch other indexes, including tracking the performance of activist hedge funds. VB |
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