Volatility benefits investors in Man’s TailProtect fund

In August, the Man TailProtect Fund posted healthy profits. Its co-manager explains what investors can expect from the volatility-focused programme

Man’s TailProtect fund definitely “did what it said on the tin” in August, proving its worth in what was a ­volatile month for equity investors.

The fund, part of a $175m tail risk programme, made 29.3% according to figures from the group, more than compensating for most equity market falls, which were double-digit but not as large as TailProtect’s rise. It made 22.4% this year by 31 August.

August was the best month yet for the two-year old portfolio, beating a 23.8% gain in May 2010, though pre-launch simulations by Man suggest it would have made nearly 40% in S­eptember and October 2008, ending that year up 89.5%. Global shares slumped about 43%.

Sandy Rattray, the fund’s co-manager, says: “We are trying to provide a fund that makes a lot of money, ­reliably, during times of crisis, and does not give back too much [in calm or rising markets].”

Research origins

The fund stemmed from research Man began on overlay programmes in January 2008, establishing a risk overlay team in February 2009. ­

TailProtect, which started in-house eight months later, opened to external clients this January.

Investors have included wealthy individuals looking to preserve large one-off capital gains, large pensions running conservative programmes, and managers aiming to maintain good Sharpe ratios – “which can get badly hurt by having 11 good months then one terrible one,” Rattray says.

Rattray cautions investors TailProtect will not repeat August constantly – the product is consciously designed to profit when volatility jumps.

MSCI data since 1974 shows rolling 36-month volatility of global shares only showed more than 0.6 correlation to MSCI World ($) once, in the late 1970s – so long-volatility strategies typically work in falling markets.

Rattray and co-manager ­Jean-François Bacmann use OTC variance swaps linked to the S&P 500, Euro Stoxx 50 and Nikkei 225 indices.

This is because these instruments have superior liquidity to exchange-traded alternatives, and allow more nuanced positioning along the ­volatility curve than one-month ­forward Vix contracts.

Long-volatility ETFs, which typically buy and mechanistically roll these one-month derivatives, made good gains in August.

But they had to endure falls of nearly 40% to July. “Being ‘long vol’, we were also down, but only by about 5%,” Rattray says.

As equity markets rise over the long-term, long volatility products will “bleed”, and TailProtect fell in 14 of its 24 months since its launch. In 2010, it lost 16.7% of its value, including simulated returns to ­September.



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