Asia Pacific Intelligence

Australian firm offers negatively correlated alpha

Monday, October 08, 2012

By Beverly Chandler, Opalesque London:

Sydney headquartered Triple 3 Partners was set up in 2009 by Simon Ho, its director and CIO. Based on his earlier experiences in the alternative sector - at Goldman Sachs, Deutsche Bank, and JP Morgan, around the world - Ho started out by designing a product, based on what he believed investors wanted.

In an interview with Asia Pacific Intelligence, Ho explained: "I had a previous incarnation in the alternative space so we boiled down what people tell us what they want and built that product for them. They wanted absolute returns; tight risk control and also negative correlation to equity in downmarkets, conditional negative correlation."<p>

With his business partner, Ho developed a volatility overlay product, with a volatility forecasting model plus an algorithm that helps them build a portfolio of options that give them the highest probability of achieving certain aims. "We basically built a better mousetrap" Ho says. And a mousetrap that fulfilled their initial three aims of absolute returns, tight risk control and conditional negative correlation.

Their flagship product is the NCA, the Negatively Correlated Alpha, which captures alpha from options markets whilst targeting strong negative correlation with the S&P500 during volatile periods. The strategy is implemented exclusively using exchange listed VIX options giving it deep liquidity, whatever the market conditions.

The firm conducted no marketing from 2009 to January this year, waiting to be able to produce proof that the system does what it says on the tin. However, word got out and during this period it was picked up, evaluated and given a high rating by Mercer and selected for the Deutsche Bank db Select Platform. It is also included in a Van Eyk fund, the Volatility Buffer, designed to act as a buffer for people invested in equities. In addition, Triple 3 currently supplies quantitative options research services to three of the largest investment banks and proprietary trading firms around the world.

The firm now has $250m under management. Gross returns for the NCA show 2011 clocking up at 9.51% and 2012 at 9.53%. The system has consistently appeared in the top 10 of performers on the db Select platform. Their Vami chart shows that the system can make money in all markets. "In two years since inception there has not been a single day where the quarterly returns in the S&P 500 has been negative and we have been negative" Ho says.

Part of the drive to create this product came from the debate mid 2010 on tail risk hedging. The firm published a white paper in September 2010 on volatility overlay, aiming to provide a counterpoint to tail risk hedging. "It has a negative expected value" Ho says. "You expect to lose money on it - you are better off if you put your money under the bed than buy a tail risk product" he says.

Opalesque produced a series of pieces on tail risk. You can access them here Part One. Part Two here; Part Three here and Part Four here.

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.