08/06/2021

Equity Dispersion – the Greeks

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In Short

Equity dispersion trading allows investors to capture the correlation risk premium embedded in equity indices and revolves around selling index volatility and buying single stock volatility.

The relative weighting of the index to single stock volatility can be varied to adjust the net volatility exposure of the trade. Fulcrum generally pursues a weighting scheme that allows investors to pick up the carry from the risk premium alongside a net long single stock volatility exposure. This potentially allows the fund to perform well in a left tail event like March 2020 (but by no means should this be viewed as a tail hedge fund).

 

The “Greeks”, namely the delta, gamma, vega and theta, will vary according to the weighting scheme and the implementation methodology. The primary objective is to buy/sell implied volatility and deliver a measure of subsequent realised volatility. There are two primary routes to achieve this; one can either hold an option portfolio and delta hedge or hold a volatility or variance swap.

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