‘Volatility 2.0’ in Focus

Terry Flanagan

ABR Dynamic Funds, which creates indices and liquid alternative products, has launched an index with an algorithmic blend of S&P 500 index futures and CBOE Volatility Index futures intended to track the U.S. equity markets in bull markets and also have a VIX component that is meant to generally outperform in bear markets.

The ABR Dynamic Blend Equity & Volatility Index, which will be calculated by consultancy Wilshire Associates, is a proprietary method of seeking profit during periods of extreme volatility, according to Taylor Lukof, Founder and Chief Executive Officer of ABR Dynamic Funds, LLC.

“We believe that every asset manager should have somewhere between 5% and 10% of their client’s portfolio in a volatility-related product,” Lukof told Markets Media. “Volatility is an asset class in itself. It’s a relatively new concept that a lot of people don’t understand, and it’s our job to educate people.”

Volatility products that were created after the credit crisis, in response to the public’s appetite for products that make money in volatile environments, haven’t impressed since.

“What followed were five straight years of the equity markets going up, including 2015, and the initial ‘volatility 1.0 products’ didn’t do as well as some people might have expected,” said Lukof.  “’Volatility 2.0′ is upon us, and we’ve tried to create products that will have positive performance when the market’s going up, and have significant positive performance in periods surrounding a major volatility crisis.”

The ABR Dynamic Blend Equity and Volatility Index performs a daily rebalance between some ratio of volatility and market exposure. The volatility exposure, which is generally lower in a bull market, can be up to 50% of the index during a major volatility crisis.  “We believe that ABR has developed a better way to know when to buy and when to sell volatility on an algorithmic basis,” said Lukof. “That is our value-add.”

With both equities and bonds seen at or near market tops, the long-accepted notion that bonds are a hedge for equities may no longer hold. “If stocks and bonds go down at the same time, people are going to be in a lot of pain,” Lukof said. “If they both went up together, they can both come down together.”

ABR Dynamic Funds, a subsidiary of ABR Management, was founded in 2015 to create indices and liquid alternative products based on intellectual property developed at the parent company.

“ABR Management licenses its intellectual property to ABR Dynamic Funds, and ABR Dynamic Funds provides its algorithms to Wilshire to build, calculate, and independently maintain those indexes,” Lukof said. It is a first for Wilshire to publish an index that’s not based on internally generated intellectual property, Lukof added.

Wilshire Associates, developer of the Wilshire 5000 Total Market Index, is a global advisory company that specializes in investment products, consulting services, and technology solutions that leverage quantitative investment techniques to analyze market risks and practical models for risk budgeting through beta and active risk analysis.

Dennis Tito, founder and CEO of Wilshire Associates, said in a statement:  “Our mandate is to provide high-quality index solutions that help investors accurately measure performance for a host of investment vehicles. We’re proud to introduce the next evolution of index solutions designed to help investment managers bring innovative product solutions to market quickly.”

Featured image by James Thew/Dollar Photo Club

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