Caissa Capital Management will consider entering variance swaps in its soon-to-be-launched Volatility Opportunity Fund, which employs a volatility arbitrage strategy. Ron Henley, partner in New York, said variance swaps are attractive for vol arbitrage players because they give a pure play on volatility, which is a more direct form of execution than other techniques, such as buying delta. As a relatively young industry, however, the fund manager would need to feel comfortable that the variance swap market is sufficiently liquid before entering into any such products, he noted. A variance swap entails the exchange of a future realized variance of an asset against a fixed nominal variance.
The fund, scheduled for launch next month, will initially buy and sell only listed single name and index options on U.S. equities, according to Henley.
Bear Stearns is the prime broker and any variance swaps will likely be executed with the firm, although if the fund becomes a large user of the swaps it may shop around for best execution, he added.
