Trends Watch: Systematic Investing in S&P 500 Index Derivatives

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 Gregory DaSilva, Founder & CIO, Meadowbrook Capital Management.  

What is your outlook for systematic investing in S&P 500 index derivatives?  

The attention given to, and resulting volume traded in, equity options continues to grow year after year.  This is especially true in the most liquid of all equity derivatives markets, the S&P 500.  The trends had long been in that favor, but the advent of “0DTE” options has only thrown gasoline on an already burning fire.   

Where there is growing attention and massive capacity in financial markets, there is often opportunity.  At Meadowbrook we’ve identified a few ways of systematically exploiting certain market inefficiencies to capture alpha in this still-growing area of the market. 

Where do you see the greatest opportunities for systematic investment in derivatives and why?    

As a systematic trading firm, our goal is to build a portfolio that performs well through many types of market environments and we believe combining several uncorrelated systems that each have different strengths and weaknesses is the best approach.   

Let’s think about where markets sit at current day.  We see an environment where the “red flags” are becoming somewhat obvious.  The Fed appears to be moving away from a tendency of financial-easing toward a tighter policy, geopolitical tensions are rising at a few “hot spots” around the globe, and the U.S. is seriously considering tariffs on a number of major trade partners – to name a few.   

At Meadowbrook, we genuinely pay zero attention to each particular macro factor.  Instead, what we focus on is the human-behavioral side of “known red flags.”  You see, the intuition for most people hearing that “the red flags are growing and apparent” would be to say, “aha, these are the periods where markets tend to either be topping or have-already-topped.” 

Unfortunately, any long-term investor out there who has lived through these cycles knows that’s not exactly the case.  Rather, when red flags become obvious to the general public, it tends to be the periods where markets sometimes top and move lower, but also the periods where markets exhibit euphoric moves higher. 

These periods become increasingly difficult for holders of long-term equity exposure who don’t want to be the last person out but also don’t want to look like a fool who missed the “biggest part of the bull market.”  

What are the greatest challenges you face and why? 

As an emerging manager in the current state of investment in hedge funds, the list of challenges goes on and on.  If we thought this was going to be an easy journey, we would have been wrong. 

First and foremost, for a firm like ours, the challenge is raising capital.  The process is long, but we believe we are growing strong relationships specifically amongst family offices.  The other challenges relate to the parts of the business that didn’t “draw” me in so many years ago when I started down this path.   

Needless to say, the part of the job I enjoy most is the research and trading.  Unfortunately, the operational aspects of running a fund are just as important as the strategy you manage.  So, on that front it’s all about developing the right relationships and finding the right partners to help us continue to grow our operational prowess. 

What keeps you up at night?   

I think the answer to this question would be pretty much the same for any systematic trader.  The greatest fear is that all the models and systems suddenly stop working.  It certainly doesn’t keep me up at night, but it’s the driving force behind all the ongoing research.  Financial markets follow a model of evolution.  We understand this well.  Traders, like strategies, like individual equities, are all the various “species” in the model of evolution.  There is only one way to survive, and that is to continually evolve and adapt to the ever-changing financial market environment.  We take this very seriously at Meadowbrook.  As a result, we are constantly monitoring the ongoing success or failure of our current models, while simultaneously researching new potential edges in the markets we trade.   

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