Fimat Global Fund Services, the prime brokerage team of Fimat International Banque SA (UK branch) is preparing to launch the Fimat Volatility Arbitrage Strategies Index over the next few weeks.
Fimat, part of the Société Générale Group, will be the first prime broker to introduce a Volatility Arbitrage Strategies Index. It is envisaged that ten volatility arbitrage funds will be participating in the index from inception with this figure growing as the popularity and the number of funds increase.
Philippe Teilhard, Managing Director of Fimat Global Fund Services group, said: "We are seeing keen interest from investors for this type of strategy whose correlation characteristics are nil to negative to most other alternative investment strategies as well as being nil or minimal to general market prices except in period of financial stress. The index we have created will give investors a better way to monitor and compare the return of their investments."
Mr Teilhard said: "As volatility arbitrage managers trade in short term, liquid and mostly Exchange-listed financial securities and derivatives, it is interesting to note that the alpha creation is done without the credit risk element inherent to conventional volatility trading seen in other type of strategies such as convertible arbitrage. This is proving to be another much appreciated diversification benefit - particularly with the level of prices currently seen in the convertible arbitrage market."
The index will be equally weighted and reporting will be conducted on a monthly basis. Performances will be collected in the funds base currency and supplied as a percentage return (Net Return) or a Net Asset Value per share or per unit (NAV).
Fimat will seek to ensure that the data is comprehensive and reliable by collecting it directly from the hedge fund managers and requiring, inter-alia, audited financial statements.
Volatility arbitrage strategies treat volatility as an asset class of its own. Funds specialising in these strategies trade the implied volatility versus the actual volatility of an identical or related tradable asset. They also form part of relative value (for example trading long/short as a "pair" the implied volatility of two different underlying assets) or transformation trades that seek to benefit from market impacts momentarily created by trading flows and liquidity situations (volatility surface arbitrage).
Funds will spot instances when the implied volatility of an option is inconsistent with historical or future observations provided by proxy instruments or correlated assets. Implied volatility is the volatility implied by the price of an option in the market, as calculated by models such as Black-Scholes. The implied volatility can be used to monitor the market's opinion about the future price behaviour of a particular asset.
Another feature of volatility arbitrage strategies is that they are non-directional, so there is no direct exposure to the market or general price trends of equities, fixed income, foreign exchange or tangible commodity prices.
Background note: Fimat prime brokerage offers a global and complete range of brokerage activities encompassing transaction, clearing, settlement, custody and financing of various asset classes. These asset classes include equities, bonds, currencies, commodities and their related derivative products, such as listed futures and options, forwards, CFDs and swaps traded on a world-wide basis.
In addition, Fimat prime brokerage can help leverage the various capabilities of the broader Société Générale Group, including high-end structured products such as equity-linked derivatives, structured notes and other customised institutional derivative products.
The Fimat Group has a global network of 22 offices and is a member of nearly 40 of the world's largest derivative exchanges and 10 stock exchanges. The Group provides global clearing and execution services to institutional users of derivatives and securities markets worldwide. Companies of the Fimat Group cover markets that account for 80 percent of the volume of all major exchanges. They offer clients access to over 500 individual interest rate, bond, currency and equity products as well as 220 individual commodity contracts, covering the full spectrum of metals, energy, grains and soft commodity products.