Titan Capital, founded by Russell Abrams in 2001, was one of the first pure play volatility fund managers in the hedge fund industry. Prior to establishing Titan, Abrams was co-head of US Equity Derivative Trading and Convertible Arbitrage at Merrill Lynch from 1997 to 2000.
Titan trades volatility non-directionally using a relative value strategy to exploit option arbitrage opportunities in both its funds: Titan Global Return Fund and Titan Asia Volatility Fund.
As Abrams explains: “We’re comfortable trading options against each other within the same asset class. FX is interesting for us right now because volatilities have been so low, a lot of the issues people are talking about are macro issues: once things move they tend to move very quickly out of nowhere, especially for many of the Asian currencies that are pegged to the US dollar. That makes for good asymmetric trades.”
As well as active volatility arbitrage strategies in its two funds, Titan also uses passive strategies, trading options to generate bond-like return streams across asset classes. It categorises the subsequent yield derived from this approach in two forms: ‘enhanced yield strategy’, which offers investors 10-year annualised returns of 6.7 to 13.2 per cent, and ‘conservative yield strategy’, which offers investors returns of 5.3 to 10.2 per cent.
“This is a black box passive strategy designed to generate a certain yield over a five or 10-year period with a high probability of succeeding by looking at different option premiums and deciding which to sell, based on where the implied volatility is, to generate that yield,” says Abrams.
Volatility funds have become popular with investors in recent times and in today’s world, which is driven by emotion and macro-type events that derive from political interference, particularly in Europe, the markets can go from “complete bliss to total panic very quickly”, according to Abrams.
Titan’s approach to volatility trading is based on two concepts: first that the world is essentially stable and people looking for yields will sell options to collect the premium; second, that when you have macro fear factors causing markets to move sharply, volatilities move up quickly.
“Our strategy is one that tries to benefit from both of those environments. In quiet times we’re collecting some money (from option premiums) and in panic mode we also do well. This worked well for us last summer when panic kicked in.
“In the last quarter of 2011 and first quarter of 2012 we had a sharp equity rally that caused the biggest ever fall in implied volatility in a six-month time period but our global fund was still positive during that period. We use a relative value approach to drive returns in the portfolio. Long volatility exposure only kicks in if markets go down.”
Abrams says that during benign markets the strategy seeks to limit how much money the portfolio’s long volatility positions lose if volatilities collapse. “That’s the biggest focus: knowing what these long positions will lose in such circumstances. A big part of what we do is deciding which options to own to maintain that exposure.”
As for where the opportunities lie in trading volatility this year, Abrams thinks that commodities and currencies are currently the most attractive asset classes.
On winning the award, Abrams says: “There’s always a great sense of fulfilment when your peers vote to give you an award as they are the most in tune with what you’re doing. We’re extremely pleased to win this Hedgeweek award.”