Volatility Hedge Funds Profit from Recent Market Swings

Some long-volatility hedge funds have made a substantial profit from the recent market turmoil, including last Thursday's still unexplained trading "glitches". While many retail investors had their stop-losses hit, or sold for other reasons, long volatility hedge funds require drastic market movements to generate profits.

Volatility funds invest mostly in the options market, typically taking long positions in calls, puts, or both. When implied volatility increases (typically high volatility accompanies downward swings), the value of these long option positions increases as well. In fact, even if the price of the underlying security is the same, increases in implied volatility can increase the value of put and call options.

Who runs these volatility hedge funds? One is run by Tim Gascoigne of HSBC Alternative Investments. That fund gained 10% last week and 4% on Thursday alone.

Meanwhile, the unexpected market action left many other hedge funds on the sideline as they tried to sort out what exactly had just happened.