Tuesday, April 4, 2017

Hedge Funds Help Dampen Market Volatility

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

No comments:

Post a Comment