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Alternative Market Briefing

How applying engineering to hedge fund risk management can work

Wednesday, July 31, 2019

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Juan Alfredo Gomez
B. G., Opalesque Geneva:

Dr Juan Alfredo Gomez, a hedge fund manager with a Ph.D. in chemical engineering from M.I.T., combines engineering process optimisation and control concepts with quantitative finance to manage the three major risks in options trading. This arrangement allowed his strategy, called Delta Managed Volatility, to produce double-digit returns for more than 10 years except for 2018.

His firm, Miami-based Black Swan Quantitative Advisors, combines a short volatility (vol) with a long vol "Black Swan" (a term for highly unpredictable events) strategy.

Short vol strategies generally sell short-term options to collect premium; they benefit from short-term options' quick time decay, he explains during an interview on Opalesque TV. (Time decay - also called theta - accelerates as an option's time to expiration draws closer since there's less time to achieve a profit from the trade.)

The problem is that short-term options can suffer from large drawdowns because, during market turmoil, three risks come together, he continues. One of those risks is the delta risk, which is when the market moves against the option. There is also the gamma risk, which is when the market moves against you fast and the losses accelerate......................

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