In August, the Man TailProtect Fund posted healthy profits. Its co-manager explains what investors can expect from the volatility-focused programme
But Man's team can control losses to an extent by careful curve positioning, by buying volatility contracts when they are relatively cheap, and having automatic sell discipline once volatility spikes.
Rattray says investors should buy Black Swan funds early. "If you try to buy insurance once your house is on fire, there will be a price for that, but not a great price. You have to buy at the first whiff of smoke."
Man's team talks of even its multi-million dollar proprietary system only being able to give forewarning in days, not weeks, before volatility spikes as markets fall.
Within one week in August, the Vix index of expected near-term US marketvolatility almost doubled to 48. Part of Man's programme, absorbing 40% of total risk, is timing purchases.
The other part, absorbing 60%, is having long positions permanently, in case the alarm system fails, or is slow.
In early October, TailProtect was weighted towards volatility contracts at the middle of the curve, dated six to 12 months out.
Rattray says: "If volatility goes down, we think those mid-dated parts of the curve will fall relatively slowly, but quite hard at the short end.
"If nothing happens, expected losses would be relatively low, whereas if you're fixed to one part of the curve, it can be more painful."
Geographically Rattray's team started increasing European and US volatility exposure in July and August respectively, after reducing Nikkei instruments that had performed strongly in March following Japan's various natural disasters.
While Man's product could benefit in rising markets by being short volatility, Rattray defends its long-only nature.
"People with long and short positions are taking a fairly substantial risk that ultimately, the short positions perform more strongly than the long ones and lose money during a crisis. We are here to provide insurance."
Man suggests an optimal allocation of 15% to 20% to increase the Sharpe ratio of a hedge fund portfolio.
But a final decision may also rest on calculations of possible losses from other portfolio assets, how much allocators want to protect, and how comfortable they feel buying a fund that will probably lose money in rising markets.