There are two directions to a vol fund -- you are either long vol or short vol. Yes you can be long/short but you end up net long or net short. The returns of a long vol fund will look something like this:
So the spike in the VIX must have been awesome for them, and awesome for the investors who had increased their allocation after Oct 2017. I am checking with the fund and once I confirm that the Monday returns are indeed awesome I will update with the name of the fund.
Then there are the short vol funds. Any vol fund that has been making money in the past two years is probably somewhat shorting vol because let’s face it, when the VIX keeps on going down, it’s close to impossible to make money on the long side.
Here we see some amazing high Sharpe returns from Global Sigma which is also a ticking time bomb. Even with such stable returns, the AUM has remained relatively small at around 300M because well, we all know that the VIX cannot stay low forever.
The fund then implemented a risk management framework in 2017 which includes a VIX prediction model that seeks to establish a Long VIX / tail risk hedge position 1-5 days before the acceleration point of a large VIX up move.
Still no investors because this risk management system was untested. Until Now. Last week the fund was flat, no big deal on Friday, and on Monday the fund was down 1.4%.
UPDATE
Global Sigma is +1.2% mtd through close today , GS Hedge (Long VIX/Vega =23% mtd gross)
Looks like the risk management system worked because if you are just short vol this is what happened:
