“Black Swan” Volatility

During their recent interview with Tobias, Jason Buck and Taylor Pearson of The Mutiny Fund discussed “Black Swan” Volatility. Here’s an excerpt from the interview:

Tobias: So, the Mutiny Fund is, from what I can see, it’s a tail risk fund, is that a fair description of it?

Jason: We’d say tail risk and long– We always say– it’s a mouthful, but always, long volatility and tail risk. So, we have the tail risk in there. I’m sure we’ll get into this. But it’s built around also long volatility to maintain some of that bleed that you would get with just pure tail risk, like a Universa or something like that.

Tobias: How do you construct a long volatility component?

Jason: You use people like Chris Cole. [chuckles] So, the way we look at it is, long volatility is that dynamic way of trading tail risk, both left and right tails. And so, they’re using their own algos or market timing to either structure those trades. So, whether it’s Logica with Wayne that’s using straddles and gamma scalping the position to manage that data bleed, but either way, he’s long volatility and maybe that’s the best describer for long volatility, is your long volatility on both the left and the right tails. And that’s probably the simplest way.

We use firms like Logica that straddles and then firms like Artemis that strangles, and we also use some opportunistic traders like Headwaters volatility. But that combination gives a long volatility profile. We add back in those deterministic rolling puts that would be typical tail risk. And then around the periphery, we use volatility arbitrage and intraday futures traders to kind of manage that bleed or give some uncorrelated rebalancing premium that we can try to maintain that profile that are at risk on cycle.

Tobias: So, what’s the objective with the fund? Is it to provide blow-up protection? Or is it to, you can allocate however much of your portfolio to it, and then it’s both, it’s going to manage through the good times and through the bad?