The investment story of 2008 and early 2009 is not a pretty one. Developed stock
markets, emerging markets and commodity markets are all down. Corporate
bonds and property are down. In this environment most diversiﬁed strategies did
not work as nearly every asset class has been affected by this broad revaluation.
Hedge Funds, noted for their ability to outperform in most markets, did not
provide any relief for their investors for a variety of reasons. See http://
However, Volatility Arbitrage is a niche within the Hedge Fund Universe that has
outperformed relative to other areas. And there is plenty of room for new
competitors in the sector. Volatility Arbitrage hedge funds returned 7.3 percent
through August according to the Newedge Volatility Trading Index. Most of these
funds continue to do well. There are a number of reasons for this performance.
•Volatility was high and trending higher. Most funds tend to be long
gamma and vega making trading and marking to market favourable.
•Sector participants beneﬁted from illiquid conditions, opportunistically
becoming de-facto market makers.
•There weren't large forced liquidations due to the positive performance of
the sector and a primarily heterogeneous ETO market. In addition, the
sector beneﬁted from forced liquidation of other positions.
•All products are exchange traded and marked-to-market daily. This allows
prime brokers and investors to feel comfortable with valuations,
haircuts and leverage.
•The ban on short selling wasn't a negative factor in performance, unlike
long/short equity and convertible arbitrage which depend more on
•Volatility Arbitrage strategies were not exposed to sub-prime credit or
CDS products and Lehman Brothers were not large prime brokers in
The common feature of Volatility Arbitrage funds is that volatility is treated as a
separate asset class; one that can be traded from the long or short side.
However, like options themselves, volatility is an asset class with skewed payoffs.
Furthermore, the edge in short-side positions is often greatest during periods of
high stress, when the need for protection is highest and buyers of options are the
least price sensitive.
Volatility is returning to more historical means as the fallout from the current crisis
settles. As markets stabilise and credit spreads return to more normal levels
there are still substantial proﬁts in Volatility Arbitrage. Proﬁts that can be made
utilising simple strategies with minimal risk which beneﬁt from lower volatility.
Prime examples are strategies which involve selling ATM straddles while buying
OTM strangles. In addition, illiquid conditions in equity and index derivatives and
the increased edge created in such an environment are likely to continue.
Trading opportunities will persist.
The Fund sees all markets as dynamic environments interacting as parts of a
global entity. The approach to such environments requires ﬂuidity and
assuredness in tactics and execution. The Funds methods of trading are of just
this nature. By being ﬂexible and judicious in applying varied strategies to the
changing conditions of markets The Fund creates a space where capital can
grow and proﬁt is preserved.
Our strategies are developed within the Volatility Arbitrage sector where our
primary objective is to generate alpha through Volatility Arbitrage in equities and
indexes. These strategies will be executed with an acute awareness of changes
in market environments. The Fund will be advantaged through use of numerous
options strategies and combinations that can be created and applied within this
sector. The Fund will utilise a three step process in Volatility Arbitrage and
Adapt. The Fund will adapt strategies tailored to market conditions and change
strategies with market developments.
Apply. The Fund will choose, execute and adjust all strategies with discipline and
Thrive. The fund will advance with changing conditions through being aggressive
in trading strategies and addressing risk.
The Fund believes in an underlying strategy of Volatility Arbitrage and the
ﬂexibility to adapt volatility strategies to all market conditions. This combination
will maximise proﬁt potential in equity and index option markets.
The goal of the Fund is to outperform equity indexes in rising markets and yield
positive returns in sideways or falling markets. The Fund will trade volatility as a
separate asset class. The options traded will be those on equity indexes and
large-cap individual equities. They will be traded on developed global exchanges.
The Fund will utilise our knowledge and experience to take advantage of
imperfections in options pricing. The Fund will trade opportunistically, using
different strategies to adapt to changes in market conditions.
The Fund will be prudent in maintaining long positions in volatility. On occasions
where exceptional market conditions warrant The Fund may be short volatility. In
these instances it will be protected by OTM options (i.e., long ʻbutterﬂiesʼ). The
Fund will be delta hedged, except where cheap options and/or speciﬁc technical
conditions present opportunities to take low risk directional positions. The Fund
will use call-spreads and put-spreads to address skew positions and reduce risk.
The Fund will make volatility spreads between similar stocks and/or indices
where relative mispricing exists. The fund will avoid situations where an absence
of liquidity could cause an adverse movement in a spread.
The Fund will use strict Risk Management parameters in establishing, holding
and adjusting positions. It will be vigilant in spreading and hedging trades at the
time they are established. Overnight risk will be addressed by The Fund
adjusting positions accordingly before the end of each trading day. The Fund will
avoid positions with large gap risk and implement stop loss measures for each
strategy. When conditions for preferred strategies are not favourable The Fund
will opt to take a more defensive stance, allocating an appropriate amount of
assets to cash.
Mr Krueger studied at the University of California, earning a B.A. in Biology in
1982 followed by an MBA in Finance at the UCLA Anderson School of
Management. He began his trading career at Macquarie Bank in Sydney, three
days after the 1987 Crash, where he traded equity options, convertible bonds
and futures. In 1991 he signed on with UBS where he set up and managed the
Australian equity options trading ﬂoor, technology and operations. He grew the
operation from a single trader to the largest and most proﬁtable ﬂoor operation in
Australia, a position Macquarie Bank holds to this day. He then headed the UBS
Asia Equities Trading desk in London before moving to New York where he
traded as an equity options market maker on the American Stock Exchange. In
2001 he returned to Sydney to set up the Asia Paciﬁc equity volatility operations
of Knight Financial Products, the derivatives trading division of Knight Capital
Group. In 2005, he moved to Liquid Capital, a London based trading ﬁrm, to
develop their Asia equity option volatility trading desk. In addition, Mr Krueger
has set up two other volatility related hedge funds. He and his wife moved to
Geneva in 2008. He speaks English, French and Russian.
Mr Cavalli earned a B. S. in Biology from the University of California in 1992. He
began his stock market career at Charles Schwab where he managed client
equity order ﬂow. He has worked in equity derivatives and volatility arbitrage
since 1996 and has been proﬁtable in over ten years of international trading. He
was an Options Market Maker in technology stocks and blue chip companies on
the Paciﬁc Coast Options Exchange with Kessler Asher Group. In 2000 he
moved to Sydney where he worked with Mr Krueger in setting up the Asia Paciﬁc
trading operations of Knight Financial Products. He later traded as an advisor at
Fort Hill Capital in Sydney; a US based international Volatility Arbitrage hedge
fund. He was the funds most proﬁtable trader. In 2007, he rejoined Mr Krueger at
Liquid Capital, where he helped build the Australian derivatives trading team. Mr
Cavalli is also active in the community and has established Aboriginal youth
programs in remote areas of Australia. He and his wife are moving to Geneva in
Q3 of 2009. He is a published writer and speaks English, French and Indonesian.
Mr Thompson gained his Bachelor of Applied Finance with Distinction at
Macquarie University in Sydney in 2002. He began his career soon after as a
futures trader on the overnight Institutional Futures desk for MAN Financial, a
global brokerage ﬁrm. In 2005, he joined Liquid Capital in Sydney, where he
became a market maker and analyst on the Australian equity options desk,
working alongside Mr Krueger. Mr Thompson and his ﬁancée live in Zurich,
where he is a proprietary energy derivatives trader for Atel Trading, an energy
trading ﬁrm. He has developed risk analysis and volatility models at both Liquid
Capital and Atel. His good sense of humour and optimism award him continued
success in the demanding environments of markets. He speaks English and