Daily Speculations

The Daily Spec: Every Once in Awhile, one gets it right. We said at the start of 2003 that all delta-neutral investments and funds-of-funds based thereupon would converge to a Sharpe ratio of -90. Also, that the contribution these delta-neutrals would make to the market would be in the trillions of dollars, and would dwarf the temporary superior returns they made in 2001 and 2002, and also that all the momentum traders, large short-sellers and users of systems based on buying the academic anomalies like the earnings surprises would lead to disastrous results considerably worse than random this year. Also that high fees, the regression phenomenon, commissions and bid-asked spreads would add to the grind and hasten the convergence to Sharpe -100 -- let's say an implicit -90% relative to the market over the next five years with a standard deviation of 1%. 

Now the numbers are out, and our prediction has held true. Here a link to a status report, forwarded to us by a reader, on some vol funds over the course of 2002 and 2003:

O'Connor ($3 billion total assets): Closed down all vol arb trading in early 2003; has moved to other strategies.

Compass ($400 million in 2001): Closed shop.

JD Capital: Pared down vol arb by about 50% in early 2003.

Amaranth: Pared down vol arb by about 70% as of mid-2003.

Goldman Prop (probably the biggest vol arb fund out there): Pared down vol arb by about 50%.

AQR Capital (started the vol arb book in early 2003): Has practically closed down the book.

BBT: Closed down vol arb portfolio in early 2003

HBK: Vol arb fund has been pared down by about 80% in early 2003.

Sagamore Hill: Vol arb fund has been pared down by about 50% in 2003.

Titan: Vol arb portfolio was pared down by about 40% (Titan is about the only fund that I know of that was up (3%-5%) in 2003.

"The Chair's and Mr. E's prediction so far are bearing fruit," observed our correspondent. "I wonder if converts are next. I know that similar stories about stat arb abound."