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Digital Subscriptions > The Hedge Fund Journal > Issue 131 – Apr 2018 > Nomura Equity Volatility Risk Premium UCITS

Nomura Equity Volatility Risk Premium UCITS

A cost-efficient, plain vanilla volatility strategy

PROFILE

Since launch in June 2015, the Nomura Equity Volatility Risk Premium (“NEVRP”) dailydealing UCITS strategy has seen the best of times and the worst of times.

Its 2017 performance of 24.9% and volatility of 5.35%, delivering a Sharpe ratio of 4.65, earned it The Hedge Fund Journal’s UCITS Hedge 2018 award for best risk-adjusted returns in the volatility arbitrage category. And early 2018 has provided a useful stress test for the strategy. As the VIX spiked to 50 on Monday, February 6th, NEVRP saw a loss of 23%, which was mostly implied mark to market related. (This was consistent with Nomura’s own, internal stress tests). The following day, performance bounced back by 21%, as the VIX settled back down in the 20s. After the February 2018 drawdown, Nomura garnered some inflows from investors who judged that the surge in volatility provided an opportune moment to invest.

The Fund was also tested within months of its launch. In August 2015, the sudden spike in volatility cost it around 13%, and this had been recovered by early 2016. Clearly, the return profile is correlated with equity and credit markets, but Nomura argue that it can recover drawdowns more quickly than a long-only holding in conventional asset classes. Nomura view the gap between implied and realised volatility as a persistent risk premium, akin to an insurance premium embedded in the price that options trade at, which can be harvested. “Historically there has been a positive pick up between implied and realised volatility around 80% of the time”, says Jean-Philippe Royer, Chief Executive Officer at Nomura Alternative Investment Management, Europe Limited (“NAIM”). The strategy is not designed to be vega neutral, but it is not taking a directional view on the level of implied or realised volatility either. Rather it just seeks to extract the difference between the two. This is a plain vanilla strategy, which is not expressing views on skew or term structure, on differences between regional volatility markets, trying to pick optimal strikes or delta hedging at optimal points in the day by gamma trading, arbitraging OTC against exchange traded instruments, or a whole host of other volatility strategies. Nor is it trading volatility across multiple asset classes or equity indices – it only trades volatility on the S&P 500 US equity index. (Royer doubts whether adding European equity volatility would provide much diversification and finds Asian equity volatility markets to be less liquid).

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