Volatility Hedge Funds Outperforming

Year-to-date, volatility hedge funds rose 7.3 percent according to data from the Newedge Volatility Trading Index (see Bloomberg article). The average equity fund fell 8.38 percent during the same time. Corporate fixed-income funds declined 4.00 percent YTD, and energy and basic- materials stock funds are down 6.36 percent over the same time frame. The 50 or so hedge funds that investing in volatility have been able to profit from the swings caused by the subprime and Fannie/Freddie news without trying to pick a direction for the market. New funds focusing on volatility are continuing to be developed nearly everyday (see previous post). This year the S&P 500 has fluctuated by more than 1 percent on 71 trading days, making this the most volatile start since 2003 and surpassing the 61 day annual average since 1928. The index is on pace to have its most volatile year since 2002, a time when there were 125 swings of more than 1 percent. The CBOE Volatility Index (VIX) also reached a five year high of 32.24 on March 17 of this year (the day after the Bear Stearns bailout), and has been 33 percent higher than in 2007, averaging 23.12 this year. Some analysts are expecting elevated volatility for the next couple of years. Nonetheless, even if volatility remains above historic levels, it is worth noting that the VIX has fallen 31 percent from its five-year high in March. As such, it appears that even trading volatility can be a volatile (and risky) move.