In times of fee pressure, institutional investors continue to use hedge funds. Why ?
There are a variety of
answers, but many institutional chief investment officers will tell you they
rely on hedge funds to help dampen market volatility and provide returns that
are risk-adjusted and uncorrelated to equity markets. Read more
This means that sophisticated investors will use hedge funds
to manage the risks instead of trying to beat the market.
Hedge funds in this category often use tail risk hedging of
some sort. One hedging strategy is convexity hedging.
The GAMMA hedging
strategy is not used frequently in the industry. The rationale for introducing
it here is that given a high price of a put option, we will try to partially
recoup its cost by actively scalping gamma, while we still benefit from the
positive convexity of the option. This means that in case of a market
correction, the gamma will manufacture negative delta so that the hedging
position can offset some of the loss in the equity portfolio. Read more
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