One of the final sessions of the day was a combination of a presentation and then a panel discussion. Alexandre Capez from Credit Suisse started things off with a discussion titled Practical Implementation of Systematic Strategies. He noted there are four sources of alpha that may be derived from volatility. First, traders may take advantage of the expensiveness of implied versus realized volatility. Second, term structure / roll down strategies. Third, there are methods of trading the expensiveness of the volatility of volatility. Finally, he grouped dynamics of skew / kurtosis or statistical relationships together.
He then addressed three general methods of extracting these sources of alpha. He noted trader may sell listed equity options and maintain a delta neutral position or sell an OTC variance swap to profit from the expensiveness of implied versus realized volatility. Selling the short end of the VIX curve and buying futures farther out on the curve is a common method of trading the roll down of the term structure of VIX. Finally, he states that selling listed options on VIX and maintained a delta neutral position is a way to benefit from expensiveness of volatility of volatility.
The second half of this session involved a panel session moderated by Alexandre as he was joined on stage by –
- Pierre de Saab, Portfolio Manager, Dominice & Company Asset Management
- Oleg Lugovkin, Volatility Trader, Argentiere Capital AG
- Marc Perrigault, Portfolio Manager, Schroder Investment Management
- Andrew Soper, Head of UK Investment Solutions Group Portfolio Management, State Street Global Advisors Ltd.
One of the first statements addressed a belief that systematically selling puts was a good way to generate returns which has brought several volatility sellers into the markets. With respect to successfully running systematic strategies managers need to be aware of changes in the markets that may impact their strategy. A follow up thought was if the market changes, what is the expected life of a systematic approach? This led to a discussion around crowded trades and when asked for an example one panel member mentioned the VIX roll down trade (mentioned above) that has worked quite well for several years, but also become a very crowded trade.
An interesting approach that came up with respect to implementing a systematic strategy involved sort of a double back testing approach. A system will be tested once and then a different individual will try to replicate the strategy. Then the two different back tested results will be compared for accuracy. The next steps involved paper trading for real time verification, then finally the system is presented to a risk committee for a final vetting.
The final question was about the emotional aspect of a system not working as expected. One panelist noted that market environment can dictated the under performance. Also it was said that when the system is experiencing a draw down that is in line with history it is easier to ride out. Another panelist mentioned that their firm will have a general stop loss based on history.