New 'fat tail' risk management product to be launched on HFR platform

A new risk management product for funds of hedge funds, pension funds and endowments will be launched on the HFR Asset Management platform in October by 36 South Investment Managers, a 'tail risk' hedge fund manager. The fund, 36 South Black Swan, is designed to provide protection for institutional fund portfolios in significant risk aversion periods.

The product is designed to be a 2.5 per cent allocation within a fund of hedge funds or pension fund portfolio. In a 'normal' or benign market environment, the cost to the investor's overall portfolio is expected to be approximately 50 basis points per annum, although this may be more or less.

In a risk aversion period, the portfolio of long-dated 'out of the money' options is expected to fire. A specific performance level cannot be guaranteed, but the portfolio return contribution in risk aversion periods is targeted at between 10 and 15 per cent, offsetting potential problems introduced by long/short equity and mean variance framework-based fund investments.

The portfolio will be built using a proprietary asset allocation process based on the 36 South Global Implied Volatility Indices and will hold only 'bought' option positions around a weighted average maturity of five years. It will be a composite diversified portfolio with a long volatility exposure to a mix of equities, interest rates, currencies and commodities. An important component of the strategy is the use of volatility proxies.

'Contrary to what many may currently feel, there are always opportunities in long-dated volatility,' says Jerry Haworth, chief investment officer of 36 South. 'One of the strengths of the 36 South investment team is our ability to find cheap proxies for global volatility risk, despite increasing levels of risk aversion.'