Toronto-based Goldenwise Capital Management does not take a traditional approach to trading and does not trade typical markets in common ways but it is hard to argue with their results.
The Canadian commodity trading advisor produced eye popping numbers since launching proprietary trading in 2010 and has earned postive returns each year since taking customer funds in 2013. Its Quantitative Multi-Strategy program, which manages $55 million in assets, returned 17.79% in 2015 and has been trading customer assets since August 2013.
Goldenwise trades stock index and volatility products utilizing relative value long/short, volatility arbitrage, statistical arbitrage, trend following, spread trading and global macro strategies.
Goldenwise CEO and chief investment officer Huakun Ding was interested in volatility markets since their formation. “I did a lot of research in this area, focusing on volatility derivative pricing and volatility trading strategies,” Ding says. He earned Masters in Mathematical Finance from the University of British Columbia, and Mathematics from Memorial University of Newfoundland. He also holds a BS in Applied Mathematics from Nankai University.
“Volatility markets are dynamic. It is not very easy to understand so you need some mathematics background,” he says. “You need to understand derivatives pricing and derivatives models.”
Ding says the majority of his trades are spreads. In addition to the CBOE Volatility Index (VIX), Goldenwise trades a European volatility index, the S&P 500, the DAX 30 and the Hang Seng Index.
“Most of the time we use mean reversion methods,” Ding says. “When volatility is too low, we go long volatility; when volatility is too high we go short the volatility.”
Ding hedges volatility positions with stock indexes. “We may have a directional trade on volatility, buy or sell VIX futures or a VIX spread. For equity index we can go long the E-mini S&P 500 and short the German DAX 30 futures. Sometimes we do pairs trading between VIX and the S&P 500; we can short the VIX and short the E-mini,” he says. “We calculate the value of the VIX and if we think the VIX is overpriced we short it, but at the same time we hedge.”
Ding is very systematic in his approach to valuations but once the numbers are in, will make a discretionary call on each trade. “We compare the correlations, the divergence between VIX and the S&P 500 and we look at the historical data of the VIX to identify if it is overpriced or underpriced. We look at the term structure of the VIX to identify inefficiencies in the market,” he says. “We use our models to do research and identify trading opportunities to give us signals but we combine them with discretionary analysis.”
Only a few of Goldenwise’s trades are directional and they are usually hedged. “We can take a directional trade on an equity index or volatility, but for directional trades the holding period is short and the position size is small,” Ding says.
Their average holding period is between one and two weeks depending on the volatility. “If the volatility is high, the holding period decreases,” Ding says. “For the S&P, we make a plan. If it is a directional trade, we need to control our maximum size. We calculate the maximum drawdown we can take. We control the position size and we control the [amount we allow it] to go down. If the drawdown reaches about 3%, we need to take some action to decrease risk. If our drawdown is 10% we exit our position.”
The strategy’s correlation to the S&P 500 is around zero but can move to slightly positive or negative. “There are times that we have straight directional trades, we can go long the market or short the market so in the short-term the correlation could be positive or negative but in the long-term the correlation is about zero,” he says.
Goldenwise does better in high volatility markets but they are not necessarily long volatility. “When the market volatility is high, generally the range of the VIX is high enough to provide more opportunities to us,” Ding says. “When [the VIX] is between 11 and 14 it is very hard for us to trade it. We need the VIX to range from 15 to 35; we have a big spread to trade. We need the volatility.”
Ding says the program’s capacity is $500 million and expects to reach it if the markets remain volatile. “It is better if we have a bear market or a high volatility market,” Ding says.
The markets are setting up golden for Ding in 2016.