When the Market Crashes… They Profit | Wayne Himelsein on Logica Capital’s Long Volatility Playbook
Apr 9, 2025
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Wayne Himelsein, CIO and founder of Logica Capital Advisors, dives into the fascinating world of long volatility strategies. He explains how his hedge fund thrives during volatility spikes, offering innovative solutions to traditional hedging problems. The discussion covers the evolution of long volatility strategies and the importance of early success in financial ventures. Himelsein also emphasizes proactive risk management and liquidity strategies essential for navigating turbulent markets, highlighting Logica's plans for blending new insights into their future fund launches.
Logica Capital's approach focuses solely on long volatility to effectively capture market stress spikes, avoiding counterproductive short positions.
Maintaining long volatility positions requires adept risk management to mitigate theta bleed, ensuring readiness for significant volatility payoffs.
Investor education on volatility dynamics is crucial, as misconceptions can undermine confidence in long volatility strategies despite improved data access.
Deep dives
The Unique Approach to Long Volatility
The discussion centers around a hedge fund's distinct approach of being solely long volatility (long vol) rather than employing a typical strategy that combines both long and short positions in volatility. This approach stems from the belief that shorting volatility to finance long volatility positions creates a counterproductive trade that undermines the very goals of investing in volatility. The speaker uses an analogy of attempting to high jump while wearing a weight belt to illustrate the illogical nature of this strategy. By focusing exclusively on being long vol, the firm aims to capture the aggressive spikes in volatility during market turmoil, which aligns with the fundamental purpose of investing in volatility.
Risk Management and the Challenges of Long Vol
The podcast highlights the inherent challenges of maintaining a long vol position, particularly the risk of theta bleed, where the passage of time erodes the value of options. The speaker emphasizes the importance of carrying long volatility with an effective risk management strategy that mitigates these losses while maintaining the exposure needed for significant payoffs during market stress. It is mentioned that many volatility strategies sell short positions to generate income, creating a situation that could lead to substantial losses when markets experience severe downturns. The focus on conservative sizing and gradual exposure allows for better management of this theta bleed and helps in waiting for profitable spikes in volatility.
Lessons from Historical Market Behavior
The episode discusses how past market events, like the COVID-19 pandemic's volatility spike and the more gradual downturn of 2022, have shaped the understanding of volatility dynamics. It is noted that the volatility behavior during these events varied, leading to gaps in expectations and actual outcomes that investors must learn from. The speaker emphasizes the crucial differences between panic-driven volatility spikes and those that occur during steady market shifts, explaining that vol does not always behave as one would expect outside of extreme events. This differentiation helps investors develop more effective strategies and realistic expectations regarding volatility as a risk management tool.
Investor Education and Market Perception
A significant insight shared is the need for thorough education among investors regarding volatility and options trading, especially the differences between long and short positions. The speaker reflects on how increased access to data and information has led to a more knowledgeable investor community, yet this does not guarantee a deep understanding of volatility intricacies. Misconceptions about the risks of options, particularly views on long volatility strategies that may stem from past failures, often create challenges in securing investor confidence. This underscores the necessity for clear communication and pedagogical efforts to properly convey the structural risk mitigations inherent in a long vol strategy.
Future Directions and Continuous Innovation
Looking ahead, the firm intends to focus on refining its existing strategies rather than branching into new asset classes or markets, emphasizing the value of expertise in equity volatility. The speaker notes ongoing improvements in their models and trading strategies, which stem from a commitment to continuous research and development. New fund launches reflect innovative approaches to integrate long volatility strategies with equity exposure, aiming to provide more robust risk management tools for investors. By prioritizing the deepening of their understanding of current strengths and enhancing performance, the firm positions itself to better meet future market demands and investor needs.
Wayne Himelsein, CIO and founder of Logic Capital Advisors, joins Other People’s Money, to discuss how his hedge fund is built to profit when volatility spikes in moments just like this. Everybody wants to carry crash protection but if implemented improperly the cost of carrying hedges can bleed you dry. Finding innovative ways to solve this problem is what drives Himelsein and Logica forward and in this discussion he discusses their approach to maintaining at the money long volatility exposure without relying on spread trades to fund tail hedges.
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