New TrueRisk funds to take on the ‘long-only’ monotony

TrueRisk Capital plans to launch a commodity pool offering at the end of the month. That will be the company's first product, but the team behind the strategy brings a set of unique technological, trading and risk management skill sets honed over decades. The TrueRisk Market Volatility Fund is launching with internal money initially and is an equity-index premium harvesting strategy, described by one of the founders as the “black sheep” among liquid strategies because of the numerous blow-ups among poorly constructed programs in recent years. TrueRisk Capital, as the name implies, is focused on risk management, in addition to being a quantitative investment manager for liquid alternative strategies, and a registered commodity trading advisor. It was created to take a research-driven and fully systematic approach to creating a basket of non-correlated market volatility strategies The firm’s principals are Ritabrata Bhattacharyya, co-founder and chief quant; Kaushik Saha, co-founder, chief executive officer and chief investment officer; and Vishal Olson, chief operating officer. TrueRisk came together because the founders agreed that the options selling/premium harvesting has underperformed in recent years and that this has created a vacuum. Bhattacharyya is a graduate of the Indian Institute of Technology, where he studied engineering and computational biology: that is, the application of mathematical modelling and computer simulation techniques to the study of biological and ecological systems. Bhattacharyya worked, for example, on the gene sequencing of e. coli bacteria. From there, it was not a great jump to develop an interest in machine learning and the modelling of market risk. At multipurpose blockchain company Blowfish Technologies, Bhattacharyya has also worked with blockchains and cryptocurrencies. Asked whether the Blowfish experiences might suggest that a future offering of TrueRisk could include trading in cryptos, Saha was emphatic: it does not. “We don’t want to be the last one holding the bag” with cryptos, he said. He cited Nouriel Roubini favorably in this regard -- Roubini has famously described bitcoin as a “pseudo-asset” that has been pumped up by “massive manipulation.” Saha expects that Bhattacharyya’s Blowfish experience will be useful on the technology side though. Saha previously was the head of mortgage research/model development at Barclays Global Investors, San Francisco, and, later, senior vice president, quantitative research, at Hercules Investments, Los Angeles. “That said, this strategy and liquid alts strategies are at a juncture in time where their future offers better outlook and potential than ever,” said Saha. “It is because all other strategies/asset classes are stretched to their valuation extremes and have painted themselves into a corner because of their inherent "long-only" constraint. Everything from stocks, bonds to crypto and NFT represent a herd of lemmings on the verge of falling off the proverbial cliff's edge.” The options market has underperformed as of late, but a technological approach is what in the team’s view has the potential to re-write the rules. Although an algorithmic approach is old hat in this area, practitioners seldom trust their algorithms sufficiently. Blow-ups are commonly the result of allowing too much human discretion to muck up a portfolio. Olson pointed out, “One commonality we’ve seen with the managers who did not survive is that their operations have left a great deal of room for heuristics and discretion.” What is worse is when there was turbulence, notably in 2018, the prime brokers pulled margin/leverage out of the liquid alts space in general. That helped to create a vacuum that still exists today. But finance, like nature, abhors a vacuum, and the question is not whether this one will fill up again but who will fill it, and how competently the job will be done. The founders’ strategy for the first launch involves three complementary, non-correlated algorithms. The first one is a non-directional algo that makes use of asymmetric butterfly spread and is short volatility. The second is an iron condor spread that is also short volatility. These two necessitate a third: the long-vol algo. The three in combination allow the system to “circumvent the shortcoming of unhedged options exposure.” The market volatility fund should have launched by the end of this month. Its objective is to outperform US equity indexes, especially referencing the S&P 500, with equivalent risk exposure, by monetizing the equity index option time premium. What that means is that the difference between the realized variance of daily S&P 500 index levels and the implied variance one can derive from option prices is usually negative. In this millennium, anyway. Eighty-four percent of all observations over the period from January 2000 to April 2021 show an implied gain from selling equity index options. The average variance risk premium to gain in those observations is 0.8%. Trade configurations will reference option contracts on E-mini S&P 500 futures and E-mini Russell 2000 futures as traded on the Chicago Mercantile Exchange (CME) One potential drawback, at least for some investors, will be that the volatile income strategy will tend to lag behind trend-following strategies during strong bull markets. But during sideways choppy markets whether bearish or bullish it will provide robust returns. The firm’s proposal also lays out risk management systems. Specifically: Any trade is exited if the loss in any month exceeds 10%.The offsetting algo systems described above ensure that the 10% threshold is almost never reachedOnce implemented, as the index moves higher or lower, new legs/hedges may be added to ensure delta neutrality, or to lock gains inPositions can be reduced/rolled back if volatility spikes beyond threshold levelsIn an uptrend, capital can be added to the trade to reduce the upside riskLikewise in a downtrend capital can be removed from the trade, allowing the True Risk to wait for an opportunity to take a profit and exitAnd in a sideways market, as the proposal puts it, “we patiently let the trade play out” which typically leads to the optimal outcomes. Following the market volatility strategy, the long/short equity fund launch is planned for later this year with a focus on index futures and options. A third launch focused on managed futures is planned for the middle of next year. A multi-strategy offering is also in the pipeline, officials said. All these offerings will benefit, the founders believe, from the absence of a long-only constraint, and from the judicious use of external or structural leverage to amplify returns.

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New TrueRisk funds to take on the ‘long-only’ monotony

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Christopher Faille

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Christopher Faille

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