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.

The World's Riskiest Hedge Funds

Below is a list of the riskiest hedge funds for the trailing 5 years. Risk ratings are based on a proprietary volatility formula based on 3yr and 5yr standard deviation of returns, as well as the worst 3 month returns. The list of riskiest/most volatile funds includes US as well as Non-US hedge funds. Commodity/Managed Futures and Trend Following hedge funds compose the majority of the riskiest hedge funds due often to the volatility and high correlation of their underlying investments.

Most High-Risk Hedge Funds:

Fund Name	Firm	City	State	Overal Risk	Fund Type
World Grain & Oilseeds Fund	DEC Capital	Lincoln	NE	99.69	Commodities
CFP IQS Fund	CFP Funds	London	UK	99.38	Multi Strategy
Fletcher Aggressive Fund	Fletcher Asset Management	New York	NY	99.06	Arbitrage
Global Partners	Global Partners LP	Chicago	IL	98.75	Multi Strategy
ICL Managed Account Program	Frontier	Fort Dodge	IA	98.44	Trend
AIS Futures Fund	AIS Group	Wilton	CT	98.13	Leveraged Long/Short
Di Tomasso Equilibrium Fund	Di Tomasso Group	Victoria	BC	97.81	Commodities
Dynamic Power Hedge	Dynamic Funds	Toronto	ON	97.50	Equity
LSGI Technology Venture	LSGI Advisors Inc	Duncanville	TX	97.50	Equity
Gerbino Gold Group	The Gerbino Gold Group	Beverly Hills	CA	96.88	Commodities
Legacy Futures Fund	Hawksbill Capital	Chicago	IL	96.56	Managed Futures/Commodities
Liberty Global Fund LP	Liberty Funds Group	Dallas	TX	96.25	Commodities
RAM Aggressive	RAM Futures	New Canaan	CT	96.25	Commodities
TMS Managed Futures Program	TMS Trade	Houston	TX	95.63	FX
Fort Orange Capital GL Strategic	Fort Orange Capital Management	Albany	NY	95.63	Trend
XT-99 Diversified	Pardo Capital	Kenilworth	IL	95.00	Trend
Permal Media & Technology	Permal Capital	New York	NY	95.00	Equity
Harmony Capital LTD Class A	Harmony Capital	London	UK	94.38	FX
Firebird Fund	Firebird Management	New York	NY	94.06	Emerging Markets
BP Capital Energy Equity	BP Capital	Dallas	TX	93.75	Energy

Overall Risk is determined based on worst 3 mo returns, 3 year standard deviation, and 5 year standard deviation based on funds with 5+ years of available returns. There are many definitions of risk and we have developed this measure simply for informational purposes. High levels of risk does not necessarily indicate a poor investment. Many riskier hedge funds have outperformed their peers in total returns. You should not make any investment decisions based on the above information.