"Every hedge fund in the world" will tell you it is negatively correlated to equities, Triple 3 Partners' Simon Ho – but only a conditional exposure to volatility can protect portfolios in a downturn.
Speaking to InvestorDaily, Mr Ho – who is the chief investment officer of Triple 3 – described volatility as "positively convex": it goes up quickly, but comes down much more modestly.
The Triple 3 Volatility Advantage Fund, launched last year, invests in Chicago Board Options Exchange Market Volatility Index (VIX) options.
"The fund is a good way for advisers to manage risk and smooth returns, and it aims to generate long-term absolute returns which are negatively correlated to the S&P 500," Mr Ho said.
While the ASX provides similar options around volatility in the Australian market, Mr Ho said the market for Australian volatility is "moribund" and lacks sufficient volume.
The S&P 500-based VIX index is much more liquid and acts as a good hedge for Australia equities, he said.
But investing in volatility is not as straightforward as it sounds, said Mr Ho – adding that continuously buying VIX futures is demonstrably a losing strategy.
"It's a conundrum – you know volatility is great for your portfolio, but you just can’t buy it all the time. It’s not a buy-and-hold strategy.
"Our fund doesn’t have a specific correlation constraint. Rather, it’s a conditional negative correlation constraint.
"It’s conditioned on the S&P going down. We want to be negatively correlated to S&P – but only when it goes down," he said.
As for the correlation with the S&P when it goes up, Triple 3 is "agnostic", Mr Ho said – but ideally the fund would like to be positively correlated.
While the Triple 3 fund has only been available to retail investors since 2014, the strategy has been running for offshore investors via managed accounts since 2010, Mr Ho said.
"We’re up one per cent when [the S&P] goes up on average, and up four times as much when it goes down.
"This is an absolute return strategy. We make money in up and down markets. But it's heavily weighted to when markets go down – it has a conditional negative correlation.
"Every hedge fund in the world tells you that they’re negatively correlated but almost none of them have a profile that looks like that," he said.
Hence the strategy is in effect the "holy grail" when it comes to absolute returns, Mr Ho said.
The Triple 3 Volatility Advantage Fund has recently been added to Netwealth's platform, and is already on Macquarie Wrap – with talks underway with BT Wrap and Asgard.
The Finance Sector Union of Australia has lodged a dispute with the commission over alleged job cuts that have been proposed by Commonwealth...
NAB’s extended remediation provisions of $525 million post-tax will reduce its cash profit by around 10 per cent for the first half and 5 ...
Prominent investor Jeremy Grantham has released a white paper detailing how the climate change sector will provide strong investment opportu...