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Alternative Market Briefing

This CTA provides hedging and returns through strong focus on volatility

Monday, March 14, 2022

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Nigol Koulajian
Opalesque Geneva:

According to an innovative CTA manager, investors are missing the true risks in markets.

Nigol Koulajian's program's goal is to provide hedging as well as returns on a carry basis. He has achieved that for more than two decades by looking at volatility more deeply. The real risk in the market, he explains in an interview on Opalesque's Virtual Manager Visit (Dec.2021), is not in the volatility but in the vol of vol (volatility of volatility).

"Effectively the vol is very low when the market is going up and then it increases dramatically on the way down," he says. "So what investors are getting paid for is the instability in the volatility rather than the vol. They're getting paid a lot for what seems to be very low volatility but in reality, they're getting paid for the risk of the vol increasing on them. So you see 8% vol on the S&P when it's going up, and then 40-50% when the S&P is going down. The instability in volatility, similarly, the instability in correlation, is what investors are actually getting paid for. We call in convexity or the fact that risk metrics are not stable over returns."

Investors are missing the true risks in markets

The risk that investors are taking in terms of peak-to-trough losses is predicted by skew, that is, the change in volatility, he explains. As investors a......................

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