Global Asset Management

True Partner article: The future ain’t what it used to be... observations on an uncertain world

Page 3: Volatility update January 2021

From our perspective as equity option traders, the correlations between equities and bonds will be particularly interesting to watch as a potential catalyst. Readers will recall the “taper tantrum” of 2013, when US bond yields rose by 100bps in less than two months, while equities sold off, a period that created attractive opportunities for our strategy. The chance of a meaningful sell off in fixed income triggering a simultaneous sell off in equities seems higher than for some time.

If not fixed income, where to find diversification? Hedge funds in aggregate generally had a good 2020, but only some offered diversification in Q1. Leaving aside for a moment our own funds (which did well), the speed of the change in markets in 2020 benefited certain tail risk strategies (also 2008 winners) that had been long far out of the money options. We give due credit to those macro managers who correctly anticipated the rapid Fed response. Perhaps they can identify the policy toolkit for next time too. On the other hand, the moves caught out some strategies that had been good diversifiers in 2008, such as some longer-term trend followers. Alternative risk premia generally behaved like risk premia, rather than diversifiers. Bitcoin, sometimes now touted as a hedge, was down 35% in Q1. Investors may wish to consider a portfolio approach, with different kinds of tools. With increased central bank intervention in markets, we believe it is important to think about which markets can move, and how quickly to take profits. Post financial crisis reforms helped reduce stress in money markets vs. the 2008 experience. What is still free to move in the next crisis?

Equity volatility remains highly sensitive to risk sentiment

Thinking about our own opportunity set, equity volatility is one of the few “risk off” barometers that exceeded 2008 levels in 2020, with the rapid changes in markets leading to a spike in the VIX slightly beyond that seen after the collapse of Lehman, albeit the reversal was also faster. Equities, being at the bottom of the capital structure, are leveraged to marginal perceptions of change, and remain one of the last places policymakers intervene. It seems to us that equities are perhaps the markets most “free” to express changes in risk sentiment where large numbers of market participants can trade in large size. In short, in a macro shock, equity products remain the fastest and easiest way to adjust risk.

Equity Implied Volatility during the Equity Drawdown10

Equity Implied Volatility during the Equity Drawdown

Q1 policy interventions were bigger and faster than in 2008, leading markets to turn positive more quickly, but in the moment equity volatility offered attractive diversification opportunities. That led to profits for tail risk managers and attractive relative value opportunities for our strategies. We were particularly pleased that our funds were able to monetise gains quickly and delivered positive returns in not only the worst week for the S&P 500 (the week ending 20th March, which was our best week of 2020) but also (in smaller size) during the rebound the following week.

If asset allocators do substitute liquid government bonds for less liquid corporate or private credit, and perhaps some public equity for private equity, that will leave public equities as even more the liquid asset in which portfolio risk changes can most easily and quickly be effected. In March, the large discounts to NAV for some corporate credit ETFs suggested that equity markets are now even being used to adjust exposures in non-equity asset classes (as some policymakers have also noted). The discounts to NAV are also a reminder of the clearing prices of credit during periods when cash instruments are seeing little volume, and prices can seem steady but are not always tradable. We think that means equity volatility will continue to be vulnerable to spikes on surprises in newsflow and changes in positioning. Perhaps more so. Market microstructure effects remain. That should lead to continued attractive relative value opportunities in risk-off periods and leaves us confident in our own continued opportunity set in such periods of stress.

But what of higher implied volatility levels? Implied volatility has retreated significantly since March, to such an extent that even if you had managed to go long the VIX ETF in late February – i.e. before the main part of the equity sell off – you would have been down substantially through end-2020. However, volatility remains above end- 2019 levels.

30-Day Implied Volatility vs Long-Term Average (2006 to present)11

Equity Implied Volatility during the Equity Drawdown

As we pointed out in our letter in January 2020, end-2019 levels were unusually low. Volatility generally remains below end-2018 levels, and substantially below in some markets. Current levels of 30-day implied volatility are closer to longer-term averages, with some dispersion across markets. A number of indices have implied volatility below long-term average (and median) levels, while others are higher. The spikes of 2020 are a reminder as to why there is typically a premium for implied volatility over realised volatility. As with levels of volatility, there is dispersion in premia too. Net, implied volatility is not necessarily “expensive”, though also not necessarily “cheap”. As always, looking across markets tells a more nuanced picture than the VIX.

If hopes are realised, vaccines will be rolled out smoothly, the virus will recede, jobs will return and the economy will recover, fast enough to pay back all the 2020 borrowing and deliver EPS growth, but not so fast as to create inflation concerns and higher borrowing costs. In that Goldilocks scenario, markets could drift higher, realised volatility may drift lower and implied volatility will likely follow at a lag. That could be a good environment for our short book, but one that may be more challenging for our longs. It could be difficult for an outright long volatility bias, though this can still offer a useful portfolio function.

Clearly, many things could also upset this picture. Most worryingly, perhaps a Covid mutation will occur that resists the vaccines, or simply one that is missed until it has spread globally. If the UK variant had emerged elsewhere, would it have been caught and travel restricted in time? Maybe markets start to worry more about debt levels for companies whose assets are lying idle, credit spreads widen and more bankruptcies occur. Maybe offices and bricks and mortar retail are permanently impaired, along with the “safe” credit instruments dependent on their rents. Perhaps climate change will result in a new property driven financial crisis, as a Harvard Business School lecturer recent argued.12 Most simply, loss of momentum and a shift in sentiment could see exuberance in certain markets reverse, triggering broader position unwinds as speculators face margin calls. With recent exuberance about crypto-assets, a sustained reversal there may have wider implications for positioning than in the past. As discussed above, we believe the increased interdependence of fixed income and equities could exacerbate any shocks.

Perhaps most likely, markets at different times face slightly different versions of these stories and ones in between, with new events that are currently off the radar. That will create both long and short opportunities, in volatility and in other strategies. We are thus happy to have a relative value approach, and to be conscious of net vega and theta exposures, as we strive to achieve a mix of Q1 and Q2 returns and avoid the partial giveback of gains we saw in the latter half of 2020.

We would be surprised if even relatively smooth sailing is not punctuated by occasional volatility spikes, as these are a typical feature of even bull markets, and have generated much of our returns during the last decade – a period when equities have, from a long-run perspective, delivered substantially above-average returns. As we look forward, we are therefore optimistic regarding the opportunity set, and our ability to deliver for our investors. We wish to thank all our clients for their continued support and look forward to our continued partnership with you in the year ahead.

–––––––––––––––––––––––––––––––

About the authors

Govert Heijboer, co-CIO of True Partner Capital

Mr. Govert Heijboer, Co- CIO of True Partner, has been active as a market maker trading in the European and Asian derivatives markets as well as positional trading since 2003. Govert started as a trader/ researcher at Saen Options in Amsterdam and rose to become the director of derivatives trading and a member of the executive team in 2007. In 2008 he moved to Hong Kong to set up and assume responsibility for all trading activities in the new Saen Options Hong Kong branch office. Govert holds a PhD in Management Science and an MSc in Applied Physics from the University of Twente, Netherlands. He is a founding partner and has worked on the launch of the True Partner Fund since March 2010.

Tobias Hekster, co-CIO of True Partner Capital

Mr. Tobias Hekster, Co- CIO of True Partner, has been actively trading for the past 21 years in various different roles in several markets across the globe. Starting at IMC in 1998 as a pit trader in Amsterdam, Tobias has established the off-floor arbitrage desk, headed the Chicago office in the transition from floor trading to electronic trading and set up the Asian volatility arbitrage desk in Hong Kong. Tobias holds an MSc in Economics from University of Groningen, Netherlands. Next to his role as Senior Strategist, he taught as an Adjunct Associate Professor at the Chinese University of Hong Kong and as an Adjunct Professor of Financial Practice at National Taiwan University.

Mr. Robert Kavanagh, CFA, Head of Investment Solutions of True Partner, has been in the hedge fund industry since 2004 and joined True Partner in 2019. Prior to joining True Partner he was an Executive Director at Goldman Sachs Asset Management where he spent 15 years within the Alternative Investments & Manager Selection (AIMS) group. Robert has extensive experience investing in hedge funds and working with a wide range of hedge fund investors. Robert is a CFA charterholder and holds a First Class (Honours) BSc in Philosophy and Politics from the University of Bristol, UK, where he was awarded a Social Sciences Scholarship.

–––––––––––––––––––––––––––––––

The full publication of this article is available as a PDF. Download it following the link below:
January 2021 Volatility Update >>

–––––––––––––––––––––––––––––––

1. Throughout this document, MSCI World refers to the MSCI World Total Return Hedged to US Dollars (source: Bloomberg).
2. “A World at Risk: annual report on global preparedness for health emergencies”, World Health Organisation Global Preparedness Monitoring Board, September 2019 apps.who.int. The report warns of the theoretical risks of “high-impact respiratory pathogens… spread by respiratory droplets… [and which can] move rapidly across multiple geographies”
3. See gmo.com
4. See microstrategy.com
5. Indeed, we note that one well respected asset manager has recently launched a product based on the prediction of a TMT unwind similar to that seen from 2000-02
6. “Distress looms over U.S. commercial real estate in 2021”, Marketwatch, 13 December 2020; marketwatch.com;
7. “Billionaires’ Row Condo Records 51% Resale Loss in Luxury Glut”, Bloomberg, January 8, 2021 bloomberg.com;
“Ho, ho — oh, no! Values of troubled Manhattan retail properties sink 53%”, Marketwatch, December 8, 2020; marketwatch.com
8. Avalos, Fernando and Xia, Dora, “US Treasuries and equity sell-offs: is the hedge faltering?”, BIS Quarterly Review, 7 December 2020
9. Indices used are the Bloomberg Barclays US Government Inflation-Linked All Maturities Total Return Index and the Bloomberg Barclays Global Inflation Linked Index Hedged USD and its unhedged equivalent. Source: Bloomberg
10. US Vol = VIX Index; Europe Vol = VStoxx Index; Japan Vol = Nikkei Stock Average
Volatility Index; Korea Vol = Kospi 200 Volatility Index (source: Bloomberg)
11. Sources: Bloomberg, True Partner. Data from Jan 2006 or earliest available through 12 Jan 2021.
12. “Are we on the verge of another financial crisis?” Harvard Business Review, 18 December 2020 hbr.org

Latest news articles

Website Privacy Statement and Disclaimer for Fund

Privacy Statement
 

True Partner respects your privacy. This Privacy Statement describes the types of personal information we collect on the website, how we may use the information, the purposes for which we may use it, and with whom we may share it.

By visiting or submitting information to this website, you are accepting and consenting to the provisions set forth in this privacy statement. If you do not agree to this privacy statement, please do not use this website.

True Partner may obtain personal information through this website, including when you send us a contact message which includes your name, e-mail address, telephone number, and any other information you provide in the message box.

During your use of this website, technical and usage data pertaining to your device and/or Internet connection is collected, including your Internet browser type, your preferences on this website, your IP address and other of your device characteristics. This is undertaken in order to manage best website experience and enhance the safety and security of the website. This technical and usage data is obtained using "cookies" or other similar technologies. In compliance with relevant law, we may retain information as needed or appropriate to serve our legitimate business purposes or as required by law.

True Partner will not sell or rent your personal information to anyone. Your personal information (e.g., IP address) will be available to our technical service providers who are administering and storing our website data. They are not authorized to use or disclose your personal information except as necessary to perform services on our behalf or comply with legal requirements.

True Partner maintains safeguards designed to protect personal information from loss, misuse, and unauthorized access, disclosure, alteration, and destruction.

This website may contain links to other websites for your convenience and information. Linked websites may have their own privacy policies or notices, which we suggest you review if you visit any linked websites. We are not responsible for the content of any websites, any use of those websites, or the privacy practices of those websites.

Additional information regarding our personal data processing purposes and the rights of those natural persons whose personal data we process can be found in our additional General Privacy Statement (pdf file).

Please contact us at phone number +1 312 675 6126 if you have any questions about this privacy statement or the personal data we hold about you.
 




Disclaimer
All information contained on this website is for informational purposes only. This information is not in any way intended to solicit investment. It is important that you do not use this website to request, authorize or affect the purchase or sale of any security, to send fund transfer instructions, to affect any other transactions or to send time sensitive instructions. Nothing in this information constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate for your individual circumstances. Any discussions of past performance should not be taken as an indication of future results, and no representation, expressed or implied, is made regarding future results. You should consider the specific return and risk profile of any investment or strategy before effecting, or agreeing to effect, any transaction.

Fund Disclaimer
This document has been prepared and issued by True Partner Advisor (“True Partner”). This presentation is confidential, is intended only for the person to whom it has been provided and under no circumstance may a copy be shown, copied, transmitted, or otherwise given to any person other than the authorized recipient without the prior written consent of True Partner. Notwithstanding the foregoing, an investor may disclose to any and all persons, without limitation of any kind, the tax treatments and tax structure of True Partner Fund, (the “Fund” or “Offering”) and all materials of any kind, including opinions or other tax analyses that are provided to the investor relating to such tax treatment and tax structure. The distribution of the information contained herein in certain jurisdictions may be restricted, and, accordingly, it is the responsibility of any prospective investor to satisfy itself as to compliance with relevant laws and regulations.

Nothing herein constitutes an offer to sell, or solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment strategy or vehicle. Any offer of securities may be made only by means of a Confidential Memorandum (the “Memorandum”), which contains additional information about the Fund and expenses associated with an investment therein, only to sophisticated investors in jurisdictions where permitted by law. All relevant Offering Documents should be carefully reviewed before investing. Any decision to invest in the Fund should be based solely on the information included in the Memorandum. In the case of any inconsistency between the descriptions or terms in this presentation and the Memorandum, the Memorandum shall control.

Past performance is not indicative of future results. The information contained herein is preliminary, is provided for discussion purposes only as a summary of key information, is not complete and does not contain certain material information about the Offering. The information contained herein does not take into account any particular investment objectives or financial circumstances of any specific person who may receive it. Parties should independently investigate any investment strategy or manager, and should consult their own advisors as to legal, tax, accounting, regulatory and related matters prior to investing. These materials may contain historical market data; however, historical market trends are not reliable indicators of future market behavior. Due to, among other things, the volatile nature of the markets and the investment strategies discussed herein, the investment strategies may only be suitable for certain investors. There can be no assurance that the Offering will have a return on capital similar to historical returns provided because, among other reasons, there may be differences in economic conditions, regulatory climate, portfolio size, leverage use, expenses and structure, as well as investment policies and techniques. Any information provided with respect to how the portfolio will be constructed is merely a guideline, which True Partner may change at any time in its sole discretion. Unless otherwise indicated, the information contained herein is believed to be accurate as of the date indicated. No representation or warranty is made as to its continued accuracy after such date.

The Fund is not registered under the Investment Company Act of 1940, as amended, in reliance on an exception thereunder. Interests in the Fund has not been registered under the Securities Act of 1933, as amended, or the securities laws of any state; they are being offered and sold in reliance on exemptions from the registration requirements of said Act and laws. Neither the Fund’s Operative Documents, nor the offering of its limited partnership interests, have been reviewed or approved by U.S. federal or state regulators. Interests in the Offering are not deposits or obligations of, or guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, The Federal Reserve Board or any other governmental agency. The interests issued by the Fund are offered or otherwise made available only in accordance with available, applicable private placement or offering rules.

An investment in the Offering is illiquid and there are significant restrictions on transferring the Funds’ limited partnership interests. There are no secondary markets for the Fund’s limited partnership interests and none are expected to develop. True Partner has sole discretion regarding the allocation of the Fund assets. The Fund represents a speculative investment and involves a high degree of risk. The Fund’s portfolio, which is under the sole trading authority of True Partner, is principally an Equity Volatility Arbitrage fund. This lack of diversification may result in higher risk.

A private fund is generally not subject to the same regulatory oversight and/or regulatory requirements as a mutual fund. The Offering is not required to provide periodic pricing or valuation information to investors. Investments may involve complex tax structures resulting in delays in distributing important tax information.

Certain instruments may have no readily available market or third party pricing. Performance may be volatile as private funds may employ leverage and other speculative investment practices that may increase the risk of investment loss, and adherence to risk control mechanisms does not guarantee investment returns. Additionally, fees may offset an investor’s profits. A comprehensive list of potential risk factors is outlined in the Offering Documents.

Investing in the financial markets involves a substantial degree of risk. There can be no assurance that the investment objectives described herein will be achieved. Investment losses may occur, and investors could lose some or all of their investment and successfully overcoming barriers to entry, e.g., legal and regulatory enterprise does not guarantee successful investment performance. No guarantee or representation is made that the Fund’s investment program, including, without limitation, its investment objectives, strategies or risk monitoring goals, will be successful and investment results may vary substantially over time. Investment losses may occur from time to time. Nothing herein is intended to imply that the Fund’s investment methodology should be considered “conservative”, “safe”, “risk free” or “risk averse.” An investment in any fund should be discretionary capital set aside strictly for speculative purposes.

Certain information contained in this document contains: forward-looking statements” which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Forward looking information is subject to inherent uncertainties and qualifications and could be based on numerous assumptions. Forward looking information is provided for illustrative purposes only and is not intended to serve as, and must not be relied upon by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability.

Performance Methodology: Past performance is not an indicator of future performance. Annualized Returns or Performance figures for True Partner Fund are based on Class B shares and are shown on a net basis after the deduction of a 2% management fees and a 20% performance fee, trading related and other expenses that an investor would have or actually paid.

The indexes’ performances do not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns. References to market or composite indexes, benchmarks or other measures of relative market performance (indexes) over a specified period of time are provided for your information only and do not imply that a portfolio will achieve similar returns, volatility or other results. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which may change over time. Indexes are used as performance benchmarks only, as True Partner does not attempt to replicate an index. The composition of the indexes is not necessarily similar to accounts managed by True Partner. The prior performance of the indexes will not be predictive of the future performance of accounts managed by True Partner. An investor may not invest directly in an index.