STRATEGY
In layman's terms the past says nothing about the future. Markets are irrational and resemble a colored noise process with little to no structure since the dynamics of the markets are constantly changing. No one knows where the market is going and we don't have to if we are market-neutral.
Auberg Capital’s market-neutral strategy seeks to deliver absolute returns in rising and falling markets. We aim to capitalize on mean-reversion tendencies. Under normal circumstances, equity markets tend to exhibit a gradual drift with occasional corrections. In such environments, the term structure of the volatility index (VIX) typically assumes a Contango shape. This means that nearer expiries are perceived as more predictable, while uncertainties increase as we look further into the future. In this scenario, profits can be generated by taking covered short positions in VIX to capture the volatility risk premium (VRP), as volatility in normal conditions gradually declines along the curve.
Conversely, when equity markets experience significant turmoil, such as a market crash, the implied volatility of options tends to surge. This spike in volatility causes the term structure to shift into a state known as backwardation. At this point the realized volatility tends to be higher than the implied volatility, in this case we seek to collect more gamma than the theta will cost.