The structure within which a strategy is implemented greatly influences the type of strategy that can be delivered in risk mitigating products.
Challenges arise in employing long volatility strategies in different investment wrappers like hedge funds, mutual funds, and ETFs due to limited options for delivering convex returns.
ETFs and separately managed accounts have unique advantages and challenges in implementing derivative overlay strategies, highlighting the importance of technology infrastructure and customization in managing derivatives effectively.
Deep dives
Devin Anderson's Insights on Strategy vs. Structure in Risk Mitigation Products
In this podcast episode, Devin Anderson, co-founder of Convexitas, delves into the significance of strategy versus structure in risk mitigating products. He emphasizes that the structure within which a strategy is implemented can greatly influence the type of strategy that can be delivered. Specifically, the discussion revolves around the challenges and trade-offs related to option-based tail hedging in various wrappers such as hedge funds, mutual funds, ETFs, and separate accounts. Anderson highlights the critical decisions managers must make regarding investment efficacy, tax treatment, and scalability when determining the appropriate structure for risk mitigation products.
Challenges of Implementing Long Volatility Strategies in Different Wrappers
The podcast explores the limitations and complexities associated with implementing long volatility strategies in different investment wrappers. It sheds light on the challenges faced when employing such strategies in hedge fund structures due to the limited options available for delivering convex returns during market downturns. Moreover, it discusses the implications of utilizing mutual funds and ETFs, highlighting issues related to path dependency, market exposure, and structural constraints that may impact the effectiveness of risk mitigating strategies.
Comparing ETFs and Separately Managed Accounts for Derivative Overlay Strategies
A comparison between ETFs and separately managed accounts (SMAs) for implementing derivative overlay strategies is presented in the podcast. It outlines how the ETF structure, despite providing intraday liquidity and transparency, may pose challenges for deploying highly convex strategies due to margin requirements and issues related to market makers. On the other hand, SMAs are favored for their ability to retain beta exposure, customization, and tax efficiency, underlining the importance of technology infrastructure in managing derivatives in SMAs effectively.
Importance of Understanding Bias in Options Pricing
Options trading requires a deep understanding of biases in options prices to make successful trades. Merely having a view on the underlying asset is not sufficient; traders must also evaluate the value of the options they are considering. This involves assessing whether an option is overpriced or underpriced and understanding the implied volatility, which impacts the option's value.
Risk Management in Options Trading and Market Dynamics
Efficient risk management is crucial in options trading, especially in terms of hedging and managing portfolio exposure. Professional risk managers employ strategies to mitigate risks and spread out execution over time to minimize market impact. Understanding the market dynamics, such as liquidity and regulatory environment, is essential for successful options trading strategies to navigate various scenarios and adapt to changing market conditions.
My guest is Devin Anderson, co-founder of Convexitas.
The theme of this episode, as you can likely guess from the title, is strategy versus structure. While we often focus on strategy specifics on this podcast, Devin hosts a masterclass as to why the structure you wrap your strategy in can ultimately determine the type of strategy you can deliver.
Specifically, we discuss option-based tail hedging and the types of strategies that can be delivered in hedge fund, mutual fund, ETF, and separate account wrappers.
In the back half of the conversation, we dive into how Convexitas implements their risk mitigating strategies. Specifically, Devin explains why Convexitas focuses on convexity with respect to the S&P 500 and actually refuses to customize this mandate, despite having the ability to do so at scale.
Finally, we end the conversation on a bit of a spicier note, where Devin explains why most market pundits overstate the influence large, scheduled derivative rolls might have on the underlying market.
Please enjoy my conversation with Devin Anderson.
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