FVAMTM is designed to represent volatility arbitrage within the hedge fund universe, and in doing so to raise the profile of this alternative investment strategy. The new Median index arises, in part, from a research project co-ordinated by Fimat Prime Brokerage, which involves Professor Bill Fung, visiting Professor at London Business School and the co-founder of PI Asset Management, along with other hedge fund specialists. The objectives of this project are to enhance the research covering this trading strategy and thus develop a better understanding of the return characteristics.
FVAMTM has started with six funds. To qualify funds must have a minimum of $20 million under management. There is no minimum required length of time a fund must have been operating prior to inclusion.
The FVAMTM started with the following funds:
- ADI Kallista Volatility Arbitrage Fund Ltd
- Astin V Master Fund Ltd
- er Global Volatility
- SGAM Volatility Arbitrage Fund
- Titan Global Absolute Return Class
- Turtle Fund Limited
"With the general increasing awareness and quantification of market volatility over the recent years, and the recent falling implied volatility's on the equity indices the FVAM will give investors access to a benchmark comprising the returns of a portfolio of managers specifically trading volatility arbitrage. We are delighted to be working with a distinguished academic such as Bill Fung and renowned Funds of Funds. We look forward to meeting new emerging managers, building the FVAMTM database and providing the larger investor community with a dedicated "pure-style" benchmark." commented Philippe Teilhard de Chardin, Managing Director of FIMAT Global Fund Services.
If a new fund becomes eligible to join within six months of FVAMTM's launch, the FVAMTM performance history may be restated to accept this inclusion.
Volatility Arbitrage Strategies
The increasing investor interest in Volatility Arbitrage is primarily related to the low correlation to most other alternative investment strategies. Also the strategy is non-directional, so there is no direct exposure to the market or general price trends of equities, fixed income, foreign exchange or tangible commodity prices.
Volatility arbitrage strategies treat volatility as an asset class of its own. Funds specializing in these strategies exploit market mispricing (trading the implied volatility versus actual volatility of a identical or related tradable asset), look for value (e.g. trading long/short as a "pair" the implied volatility of two different underlying assets) or put on transformation trades to benefit from market impacts temporarily created by trading flows and liquidity situations (volatility surface arbitrage).
Managers will spot instances when the implied volatility of an option is inconsistent with historical or future observations provided by proxy instruments or correlated assets. Implied volatility is the volatility implied by the price of an option in the market, as calculated by models such as Black-Scholes. The implied volatility can be used to monitor the market's opinion about the future price of a particular asset.
Proprietary traders have been trading this strategy for a long while, however it is only in the last few years that volatility arbitrage has emerged in the hedge fund arena. There are only a small number of funds trading this style. EuroHedge Magazine (May 2003) this year estimated that the assets under management in Europe are close to $500 million.
Initially the FVAMTM is being distributed from Fimat Prime Brokerage directly to interested parties.
