Hedge fund volatility strategy PM returns and drawdowns
Hi, can someone provide typical returns for PMs running volatility strategies at hedge funds such millennium, capula, citadel etc. Alao, what drawdown limits do these PMs typically have contractually and how much is a typical usage for vol strategies. Also, what is typical sharpe and holdingbperiod of such strategies as well as number of strategies run concurrently. Say for $100mm capital at risk, what is typical net and gross vegas and correlation sensitivities etc. Thank you very much.
I can't speak to these firms, hopefully, someone else can. However, a general guideline is a maximum drawdown of 3-5% and a Sharpe ratio of 2+. This should indirectly take care of your vega exposure and force your correlation near zero.
Guys, can anyone help please.
You need to be more specific. running vol arb at MM is different from a prop shop / market-maker. The risk constraints, strategies, gmv will differ.
Assume MM and doing vol arb, so not outright long or short vol. Thanks
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I'm curious in what setting you've seen long vol and tail risk? Most of these are niche funds and the return profiles are not acceptable at platforms. Do they have special risk parameters?
Short vol and RV in the context of platforms is generally what's run by vol arb groups. Though with differing success as the space has become quite crowded in last 8 years or so.
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surprising voloridge is dedicated vol fund. Didn't the head guy win netflix competition and work briefly at a trend following fund. I always thought they were quant equities.
The eurekahedge index is quite telling. Despite the sudden surge for tail-risk / long vol that general strategy group has been a huge loser over the last decade.
Do you find groups here focus more on greek exposures or a more generic VaR for measuring risk?
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Still surprising Voloridge is in the options space! Though it does explain the outsized returns of las couple of years. they were always seen as quite innovative in the quant equity space and their returns were significantly superior to competitors. Probably not quite on the level of PDT/DeShaw but very strong. Though learning that they had a short vol operation makes me question how much that performance was due to vanilla market neutral equities book.
The only successful long vol 'groups' were traders at prop shops / market-makers that were given a book. Essentially former flow traders at banks that moved over and wanted more PnL. Essentially looking for mispricings related to events. However, like you say its hard to consistently make money like this and it has very low Sharpe (but probably much better risk profile). Huge fan of Cole and Artemis btw (Taleb's a bit too incendiary...). though I believe that Artemis can also be short vol.
I meant groups for vol arb (essentially non market-making groups at prop shops and large platforms). Its fascinating to me because traditional risk measures don't work well, market exposure as described in marketing documents I've seen primarily talk about VaR at 95/99 but that is useless in sudden vol spikes like in Feb/Mar yet numerous short vol groups have weathered the storm (I'm at least certain those PMs still have jobs!). Hence curious if there's some standard risk management bible for vol groups.
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