The document outlines proprietary trading strategies focusing on equity volatility and portfolio hedging, emphasizing market-neutral returns through volatility arbitrage. It details the execution process designed to reduce transaction costs and improve risk management while providing backtested returns for various arbitrage strategies. Additionally, it discusses portfolio insurance as a crucial risk management tool to mitigate potential drawdowns in hedge fund strategies.

1. Equity Volatility Trading:
Diversified Proprietary Strategies for Alpha Generation & Portfolio Hedging
Contact:
David Hamilton
t: 212.217.1556 m: 917.499.7331
davidehamil@gmail.com

2. Strategy Defined
Volatility Arbitrage is designed to produce absolute, market-neutral returns.
• Strategy continually looks to exploit pricing inefficiencies in various
options classes to generate consistent profits.
• Trade duration might vary from a few weeks to a few months.
• Strategy uses only exchange-listed options on US stocks.
• Strict execution and oversight guidelines ensures:
– Reduced transaction costs and market impact (Proprietary trading
technology utilizes all available liquidity to ensure positions are initiated and
closed in the most efficient manner possible).
– Increased speed and effectiveness of Risk Management
(Proprietary tools also designed to identify and rapidly reduce risk across both
strategies).
2

3. Relative Value Arbitrage (1 Month Maturity)
10-Year Backtested Returns, Jan 2002-Jan 2012
Average (vols x 100)
Sharpe
Stdev
2002-2011 2010-2011
0.0300
0.0151
2.2601
1.3197
0.0459
0.0395
Bin Frequency
-0.06
5
-0.04
5
-0.02
15
0
30
0.02
50
0.04
40
0.06
42
0.08
25
> 0.08
28
3

4. Relative Value Arbitrage (3 Month Maturity)
10-Year Backtested Returns, Jan 2002-Jan 2012
2002-2011 2010-2011
Average (vols x 100) 0.0283
0.0286
Sharpe
1.8259
1.9300
Stdev
0.0537
0.0513
Bin Frequency
-0.06
6
-0.04
13
-0.02
21
0
28
0.02
39
0.04
38
0.06
30
0.08
25
> 0.08
31
4

5. Strategy Defined
Portfolio Insurance is a vitally important, yet often overlooked, element of
traditional and quantitative Long/Short equity strategies employed by
hedge funds.
When used properly, it should serve as a key component of the risk
management process, seeking to preserve investor capital by locking in
gains and preventing/minimizing any potential drawdowns.
Design and use of Portfolio Insurance can be outlined in the following steps:
• Identify Hedging Needs
• Hedge Valuation/Optimization
• Hedge Implementation
5

6. Hedge Identification
Determine key underlying risk(s):
• Entire/partial portfolio
• Net Beta exposure
• Volatility/Correlation risk
• Binary Event risk
• Tail risk
Underlying Strategy Time Horizon:
• Short Term (1-2 days)
• Medium Term (3 days – 1 week)
• Long Term (1 week+ )
Additional Consideration Factors:
• Momentum/Mean-Reversion Indicators
• Directional Indicators
Identifying all contributing factors in systematic fashion allows for efficient pricing,
construction and optimization of strategy hedges.
6

7. Hedge Valuation/Optimization
• Determine prevailing levels of implied volatility in the marketplace.
Valuation
• Can use simple comparisons to historical means or multi-factor
valuation model, using both technical and fundamental inputs.
• Develop Optimal Hedge given market levels, strategy timeframe,
available liquidity (stock-by-stock, group of underlyings or Portfoliowide) and additional indicators.
• Simple Hedges (Fixed-Strike Index Collar, Put Spread Collar).
Optimization
• Complex Hedges (Dynamic Index/Sector ETF Collar, Index
Variance, Futures and Options on Volatility (VIX), Synthetic
Correlation Plays, Customized OTC Instruments).
7

8. Hedge Implementation
Example – Ratio Collar on SPX
BUY: 1 6mo 98% Put
SELL: 1.5 1mo 101% Calls
BACKTEST PERIOD
Jan 1999 – Jan 2010
SPX Level at Start: 1,234.40
SPX Level at Finish: 1,150.23
PERFORMANCE
Avg. Return (monthly): 0.30%
Standard Dev. (monthly): 1.28%
Avg. Return (annualized): 3.60%
Sharpe: 0.81
TOP GRAPH:
Absolute returns, SPX + Collar v. SPX(in SPX points)
MIDDLE GRAPH:
Annualized volatility (SPX + Collar, SPX, Collar/SPX)
BOTTOM GRAPH:
Monthly returns, SPX + Collar v. SPX(in SPX points)
8