US-based Ansbacher Investment Management plans to launch an equity index variance swap strategy in the third quarter of this year to take advantage of the persistent overpricing of broad-based equity index volatility.

Ansbacher Investment Management plans to launch an equity index variance swap strategy in the third quarter of this year to take advantage of the persistent overpricing of broad based equity index volatility.

'Variance swaps are a pure play in a space where we already have years of experience,' says the firm's president Max Ansbacher. 'They offer a way to capture the excess volatility risk premium generated by the hedging activity of the large number of investors who are long equities.'

He argues that equity investors tend to overpay for index puts to insure their portfolios, driving up index option prices and causing index option implied volatility consistently to exceed subsequent realised volatility. 'This overestimation, in fact, averages almost 33 per cent a month and is something we have taken advantage of in our index option selling programmes,' Ansbacher says.

Variance swap strategies can be structured in a systematic way to gain not only exposure to this premium, but to hedge effectively against the tail risk inherent in being short volatility. The strategy will be short near-term variance swaps on a basket of domestic and international indices and will hedge the exposure with longer-dated forward start swaps.

'Interestingly, while there can be no assurance of future results, our backtesting shows that some of the best performance from this programme comes during large drops in the equity markets,' adds Ansbacher Investment Management director Jason Ungar.

The firm says it is one of the oldest volatility trading firms in the US with a track record going back to 1995. In addition to the variance swap programme, Ansbacher offers a low-volatility market-neutral index option writing strategy as well as active programmes benchmarked to the CBOE Standard & Poor's BXM and PUT indexes.


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