Trends Watch: Relative Volatility Absolute Return Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with Mark Anderson, Managing Partner, MBH Capital Management.  

What is your outlook for relative volatility absolute return investing?

Currently I think there is a lot of opportunity in the space. With mega caps leading the index, there are a lot of great opportunities to trade dispersion. Also, with the market hyper-focused on jobs, rates, and the Magnificent Seven, calendarized structures in the SPX around these events are an attractive edge to capitalize on. I refer to it as being locally concave for income generation and globally convex to protect and profit from tail events. With daily option expirations we sell shorter dated volatility day-to-day while buying the expirations tied to events-selling. I focus on controlling drawdowns, to enhance the potential for geometric returns, allowing for more attractive compounding over time.  An example I really liked that Mark Spitznagel used in his book Safe Haven was that of a merchant company with ships in Europe that were prone to pirate attacks. They determined that one out of every 20 ships would sink. For each sunken ship, they’d lose $10,000. Their insurance offered $6000 per sunken ship. Seems like a bad bet, right? You would pay $12,000 in insurance for the 20 ships. That is more than the $10,000 you’d lose for 1 out of 20 ships on average being lost to pirates. But it isn’t a bad deal when looked at geometrically. 

The stable cost of $6000 per sailing and not having that $10,000 drawdown actually generates more money over time. It’s a win-win for both the merchant and the insurance company. A paradox!  This is an example that risk reduction (volatility reduction) by way of diversification that provides better geometric returns with smart, defined ways to reduce risk via diversification.

Where do you see the greatest opportunities and why?

I see the greatest opportunity in short-dated SPX options zero days to expiration to seven days to expiration. These options allow me to take smaller position size from a day-to-day risk perspective but benefit from a high frequency of occurrence and daily compounding of returns. Trading volatility across these durations has been quite good.

What are the greatest challenges you face and why?

I always see the greatest challenge in the fact of making assumptions to backstop your strategies against and ensuring data is not over-fit. My view is that many contemporary strategies rely on data from 2022 onward, overlooking key market events that shaped the landscape prior to that period. In my view, a robust strategy should incorporate a broader historical context—ideally from 2014 to the present which encompasses the 2014 October crash, the 2015 market correction, the prolonged bear market of 2016, the low volatility run-up of 2017, the significant decline of 2018, the rapid downturn in early 2020, rapid rate increases by the Central Bank in 2022, and the recent speculative boom in AI in 2024. Such an extensive dataset not only tests a strategy against diverse scenarios but also validates the underlying hypotheses driving its design.

What keeps you up at night?

It's the government debt bomb. It is not sustainable, I think it incentivizes excessive risk-taking, and it looks like it is widely accepted by everyone in Washington the bill will come due eventually. I’m curious to see how this affects the markets when there is potentially demand for liquidity. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.