“If you are an options writer and you have the same type of returns that you had prior to the most recent quantitative easing; if your return profile was up 10% to 20% prior to 2015 and if you kept that same return profile in recent years, the only way we see people doing that is by radically dialing up risk,” he says.
The only place to make money in volatility in the last couple of years is to be massively short volatility. Kimple says the way a lot of people are preserving returns is going into these double and triple levered structure products related to volatility. “It is a disaster waiting to happen and something we are monitoring very closely,” he says. “We aren’t going to dial in our return profile when our opportunity set is limited like it has been during the last couple of years. It has been challenging for volatility traders and if you are pressing your risk to get the 10% to 20% return, it is going to have a bad end, probably sooner than later.”
He adds, “A lot of people are cognizant of that and as such we think it is going to be self-fulfilling. Volatility is going to come back because central banks realize they have to start unwinding their balance sheets. Volatility, like every other market, has cycles and as such we are preparing ourselves for a new cycle of expanded volatility.”
Even though Strategic has underperformed the last few years, it has handled the few volatility spikes well, such as in October 2014, August 2015, January 2016 and Brexit in 2016. In fact, it recently was given the Pinnacle Award by CME Group and BarclayHedge as the Best Options Strategy over the last five years.
“We had one of our best months in last two years because of the volatility of Brexit. When volatility spikes the next time, we hope we are going to be prepared for it. And when it has spiked in the last four or five years, even though our returns have been lower than their historical norm, we have kept our risk in check and we haven’t had any outlier risk events,” he says. “A lot of guys with the flashy returns the last couple of years had 10% to 20% losses. When we get back in an environment of more normalized volatility, if these guys do not adjust it is going to be very painful for them. Arguably, that is the environment where we do our best work.”
Warrington’s track record speaks for itself. Strategic averages more than a 10% returns over 20 years. There are very few options focused CTAs that have persisted for more than 20 years.
When Kimple launched Warrington he went to his perspective client base with something different. He sought to hit singles and doubles instead of home runs and avoid the strike out. “My idea was to produce consistent non-volatile returns no matter what the stock market did,” Kimple says. “I like to argue that 20 years later with real client money, real success, through some of the most difficult and challenging markers we have ever seen — bull markets, bear markets, sideway markets, terrorist impacted markets [and] central bank dominated markets — we accomplished our goal. “