Diversification should include human capital in portfolio construction for true risk management.
Balancing carry, certainty, and convexity through long volatility options can enhance capital efficiency.
Market turbulence presents challenges in predicting returns for long volatility strategies due to various factors.
Combining diverse strategies and managers helps cover market scenarios and optimize risk management.
Deep dives
Understanding Long Volatility Investments
Long volatility investments involve opportunistically buying options on both tails of the market to limit the bleed associated with regular put options. This strategy aims to reduce downside risk with a more balanced approach, incorporating puts and calls opportunistically based on market conditions, reducing the certainty but improving the carry of the position.
Building a Diverse Portfolio for Protection
The podcast episode discusses constructing a portfolio with a mix of long volatility options, relative value strategies, and intraday trend following to manage risk efficiently. By utilizing these strategies collectively, the portfolio aims to balance carry, certainty, and convexity to increase capital efficiency and mitigate potential losses.
Evaluating Performance in Market Turbulence
In market turbulence, long volatility investment strategies can be challenging to predict in terms of returns. The podcast highlights the difficulty in accurately predicting outcomes due to factors such as path dependencies, timing, and the impact of implied volatility. Despite the unpredictability, the ensemble approach with diverse managers helps cover various scenarios.
Market Performance in 2022
The summary touches on the performance fluctuations seen in 2022, where some managers have faced significant downturns due to slow market declines and lack of realized volatility spikes. Examples like VXT and PPUT show declines exceeding those of the S&P, indicating the challenges faced by various strategies in the current market environment.
Different Trading Strategies Performance in Current Environment
Traditional tail risk or long volatility trades struggled this year, contrasting with success in currency, fixed income, and dispersion trades. Classic tail risk trades are beneficial during liquidity events like March 2020, whereas slower drawdowns favor trends like commodity trend following. Understanding the VIX index and its expectations for forward variance is crucial for traders, with strategies needing to adapt based on market conditions and volatility.
Position Sizing and Risk Metrics in Portfolio Construction
In portfolio positioning, considering different money paths from at-the-money to deep out-of-the-money options is vital to cover various market scenarios. Overlaying strategies with diverse monetization tactics enhances portfolio resilience. Risk weighting managers based on downside metrics like Sortino ratios and maximum drawdowns optimizes risk management. Building a portfolio that balances offense and defense assets with prudent position sizing ensures long-term sustainability.
Challenges and Strategies in Portfolio Management
Managing drawdowns exceeding maximum limits poses a significant challenge in portfolio management. Evaluating managers' performance during drawdowns and potential redemptions from major clients necessitate strategic decisions on portfolio diversification. The significance of portfolio rebalancing, risk metrics, and leveraging uncorrelated assets for returns and risk mitigation is emphasized for sustainable financial outcomes.
Combining Liquid and Illiquid Assets for Portfolio Resilience
The concept of 'Cockroach 2.0' involves blending liquid asset portfolios with illiquid private assets to enhance overall portfolio performance and durability. The integration of liquid and illiquid assets in a symbiotic manner aims to strengthen the portfolio's robustness across market cycles. Creating a comprehensive investment philosophy and strategy that incorporates diverse asset classes, including crypto, fosters long-term financial stability and growth.
Today’s guest is Jason Buck, founder and CIO of Mutiny Funds, which specializes in volatility, options, hedging, and portfolio construction.
In today’s episode, Jason shares the winding path that led him to launch Mutiny Funds and focus on the risk management side of things. We spend a lot of time talking about what true diversification looks like and why people don’t consider human capital when constructing portfolios. Jason shares how this led him to launch the cockroach portfolio and long volatility strategies.
Today’s episode is sponsored by The Idea Farm. The Idea Farm gives you access to over $100,000 worth of investing research, the kind usually read by only the world’s largest institutions, funds, and money managers. Subscribe for free here.
