Negatively Correlated Alpha (NCA)
Triple3’s NCA is a volatility-focused strategy designed to capture alpha from liquid exchange-traded VIX options. It aims to provide strong negatively correlated returns to the S&P500 in bear markets by capturing mispricing opportunities in both puts and calls.
NCA imposes risk management constraints to reduce ‘Black Swan’ impacts on returns in any given month, making the strategy ideal for lowering an investor’s overall portfolio volatility while capturing upside from the options’ alpha.
Triple3’s investment process is quantitative, systematic and centers on the exclusive use of options. Our portfolio is comprised of VIX options, which are dynamically adjusted, in order to maximize alpha and manage risk to specific levels. Our process follows three key steps:
- We forecast the distribution of price and volatility for the S&P500 and VIX indices.
- The distributions are then compared with those implied by market prices.
- A proprietary algorithm determines the optimal combination of VIX options to maximize absolute returns subject to the risk parameters of NCA. Years of work have gone into developing and refining our models for this task. Thorough testing of our proprietary techniques shows they are extremely accurate compared to the latest published GARCH and SV models.
Why Volatility? Why VIX?
Volatility is the key input in calculating an option’s price. It represents the expected variability in the underlying asset. The terms ‘options’ and ‘volatility’ are often used interchangeably.
It is well documented that options possess a strong and persistent source of alpha. The cause of this systematic overvaluation stems from a shortage of those willing to supply options versus those wishing to consume them. The volatility inherent in options markets is both negatively correlated to traditional assets and relatively untapped. Volatility is now recognized as a distinct asset class and can only be accessed by using options.
VIX related markets are especially interesting because they exhibit even stronger alpha potential than standard index options. And as they are negatively correlated with the S&P500, it makes them ideal for portfolio diversification. VIX options have been one of the fastest growing option markets in recent years and now rank as one of the world’s most liquid. Triple3’s specialized experience and focus on volatility puts us in a powerful position to harness the alpha from VIX options.
Investing in NCA
Institutional clients can access Triple3’s expertise via managed account or the Deutsche Bank Alpha Select Platform. NCA provides clients with daily liquidity and complete portfolio transparency.