New York-based investment fund Victus Capital is considering using over-the-counter derivatives in its equity volatility arbitrage and convertible arbitrage USD215 million hedge fund. The fund, dubbed Vicis Capital, launched in June and almost exclusively uses listed options.
"We will consider using OTC derivatives but we have not found any opportunities there to date," said Shad Stastney, partner and co-founder, adding that he would use them in a more liquid market in which derivatives were not used solely for directional speculation, but were instead used for daily hedging and re-hedging.
Any speculating on volatility, either long or short, is ultimately too risky, Stastney added. Over the past few years, a lot of volatility arbitrage funds have gone belly up because they speculated long volatility while the VIX sunk to historically low levels. Speculating on the VIX is like speculating on the S&P 500, he said. "It's not a game you can win consistently."
When volatility between puts and calls diverges due to concern over a particular stock's future, the firm will sell the puts that investors want and buy the calls they wish to lose. "That gives us the opportunity to hedge our position in the underlying stock and wait for the volatility of the two to converge," Stastney said. Victus' convertible arbitrage strategy allows the firm to buy and sell convertible bonds on a hedged basis. "On the equity volatility side, we are seeing limited although improving opportunities," he said, explaining the strategy allows the firm to spread volatility either within names or between one or more names.
The fund, which is entirely U.S. focused, may at some point pursue these same strategies in Europe and Asia, Shastney added. "For right now, we're still growing into our capital base."