Volatility hedge funds, the niche hedge fund strategy that focuses on using options to bet on price fluctuations in securities, have been the only positive performers in the European hedge fund market. According to an article on Bloomberg, volatility hedge funds rose 5.1% through June 2011 while their European counterparts in every other strategy floundered. Volatility hedge funds typically outperform when the rest of the market underperforms, as they are betting on wild price fluctuations and unpredictability. Global market turmoil resulting from events such as the Japanese earthquake, the American and Greek debt crises, and wild swings in oil prices have led to success for volatility traders while their colleagues post massive losses. John Paulson’s Paulson & Co., one of the world’s largest hedge funds, has posted a near 30% loss YTD in his main Paulson Advantage Plus Fund.
However, it is not simply betting on volatility alone that has pushed volatility hedge fund performances higher. The Chicago Board Options Exchange’s VIX volatility index has held relatively stable, but the implied volatility of options on VIX has soared to a 14-month high in the first week of August. Volatility hedge funds have been able to create their own volatility by shifting their positions more frequently and creating new positions while simultaneously unwinding old ones amidst mass global confusion. This has allowed volatility hedge funds to remain one step ahead of their more traditional counterparts in the hedge fund industry. |
