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B. G., Opalesque Geneva for New Managers: The Ambrus Group claims to provide massive crash protection through tail-risk hedging without bleeding investor capital in normal markets.
Tail risk is when an asset or portfolio moves more than three standard deviations from its current price. It is the chance of a loss occurring due to a rare event, as predicted by a probability distribution. Hedging against tail risk aims to enhance returns over the long term, but investors must assume short-term costs.
The Ambrus Group, founded in 2020 and located in New York, runs a couple of funds and specialises in carry-neutral tail risk hedging as a cost-efficient protection against market crashes. The team, which has decades of experience building and trading quantitative derivative strategies, has developed proprietary strategies that aim to offset losses typically incurred by the usual tail-risk products.
"This type of strategy is designed to produce large returns during market crashes while aiming to be flat during normal markets," Kris Sidial, one of the co-founders, explains during a recent Virtual Manager Visit Video. "So, investors use us as a defensive alternative to protect their portfolio from a crash. When you traditionally think about tail-risk hedging, investors are used to experiencing a constant bleed, and we believe that can be costly, and over a certain period, it defeats the purpose of what a hedge is designed to do. So, this style of carry-neutral tail-risk hedging allows investors to participate in the best of both worlds, having a good defensive hedge without depleting large amounts of capital while you wait for volatility to erupt."
The carry of an asset is the return obtained from holding it (if positive), or the cost of holding it (if negative).
In the traditional model of tail-risk hedging, he continues, managers lay out the cost of the tail and allow that to bleed to zero. Ambrus aims to be more tactical about it through active trading and using the profits to control the losses. "We designed our product to solve that problem by using short-term proprietary trading to minimize the bleed that comes with being long volatility."
A two-bucket portfolio
Ambrus runs, essentially, a "two-bucket" portfolio. "Bucket A is straightforward," Will Wise, another co-founder, explains. "It's the convex protection we're acquiring. Bucket B is the bleed mitigation bucket. The returns from those trades offset the losses from the protection during years of no vol event. The bleed mitigation trades, alpha, are based on structural fractures we've identified over years of trading. So think of other imbalances that we're able to forecast, most of which are intraday trades."
The absolute highest priority with the bleed mitigation strategies is to ensure they will not impact the portion of the portfolio that is responsible for investor protection, he adds. Furthermore, the two buckets are uncorrelated to each other.
Simplicity is critical in these kinds of strategies, says Sal Abbasi, the third co-founder. "Vanilla options on the S&P are going to be much more predictable in a crash than complex structure derivatives. Think of 2008, for example, when all these complex structure derivatives that were supposed to hedge people ended up increasing the contagion. The instruments that we hold are directly inversely proportional to the market."
These are not the strategies you hold if you are worried about a 5% drop in the markets, he adds. "We would expect to make money as the VIX goes to 40 and above. But there are other factors involved, such as the market positioning and the velocity of the VIX moves."
The CBOE Volatility Index (VIX) has had a 52-week range of 12-23% so far.
You can watch the whole interview on Opalesque Virtual Manager Visits here:
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