Short Volatility Strategies: Identification, Measurement, and Risk Management

Mark Anson and Ho Ho

Volume 1, Number 2, Second Quarter 2003

Many investors demand position transparency from hedge fund managers in the belief that more information is better than less. However, certain hedge fund strategies create synthetic investment positions that resemble a short put option, and these positions are not revealed by position transparency. Specifically, event-driven hedge funds and merger arbitrage hedge funds have significant exposure to volatility events. We identify and measure this short volatility exposure, providing the transparency that is lacking from position disclosure. In addition we examine ways to manage this short volatility risk.