Ambrus, whose founders and co-CIOs, Kris Sidial and William Wise, featured in The Hedge Fund Journal’s 2024 “Tomorrow’s Titans” report on rising star hedge fund managers, have reconciled returns and protection through a disciplined three-pronged mandate, savvy trading acumen, smart trade execution and a measured approach to monetization of volatility spikes.

The first plank of the mandate is to minimize bleed, the second is to monetize some returns during volatility spikes (generally when the VIX surpasses 40) and the third is to consistently maintain some meaningful protection that could generate exponentially increasing – and potentially spectacular – returns if volatility continues to climb.

Ambrus aims to be “carry neutral” by financing the protection with proprietary intraday trading strategies dubbed “bleed mitigation”. This concept is very different from some other volatility managers who view carry neutrality purely within a framework of option structures and define it as theta neutrality. Ambrus is committed to paying time decay on its tail risk protection but is confident that consistent profits from its “bleed mitigation” strategy will cover the costs of “loss mitigation” protection.

Balancing bleed mitigation and loss mitigation

The two strategies are run as separate buckets, but proprietary trading profits help to determine the budget for tail risk protection. The idea is that proprietary trading profits from the “bleed mitigation” bucket help to fund the cost of protection that is acquired in the “loss mitigation” bucket. Profits from the “bleed mitigation” strategy are in fact more or less mechanically recycled into the “loss mitigation” strategy, subject to some constraints. While more trading profits will allow for more protection to be bought, a minimum level of protection is maintained even on rare occasions when the trading strategy is flat or down.

Record short vega backdrop

Additionally, Ambrus can exercise some discretion to increase protection when they judge that markets are primed for a volatility spike. For much of 2024 Ambrus has observed record levels of vega selling measured by several criteria: short vega exposure, assets in volatility “income” funds, and overall option trading volumes. Ambrus estimates that since 2018, short vega notional has doubled, and assets in derivative income funds are up tenfold. They additionally think that multi-strategy hedge fund “pods” and QIS are crowded into dispersion trades that further suppress volatility. “Record volumes of options traded overall increase reflexivity risks for market makers and some funds. Even if short volatility funds have some degree of tail hedges, which have probably prevented blow-ups, they will still be forced to buy back some short volatility upon a spike,” says Sidial.

This increases the risk of a recurrence of the early August volatility event, not least since market makers who have sold a lot of exposure may be offside if there is a sudden and discrete gapping move. A slow and continuous move can be substantially dynamically hedged, but a sharp gap leaves market makers heavily short of gamma.

The unique August 2024 volatility spike

The August 2024 volatility spike was very different from the February 2018 “Volmageddon” when short volatility funds capitulated and some such as the XIV ETF imploded. In August 2024 a small number of volatility funds had double digit losses, but most of them had recovered by month end for various reasons. Most obviously, the VIX spike was very short lived, but there were also special issues around the timing of events, VIX calculations and margin calls.

Sidial explains: “The VIX spike started on a Sunday night which meant that the headline VIX figures reported were somewhat inflated by limited liquidity blowing out bid offer spreads. Screens showed a VIX as high as 65 but the futures peaked in the high 30s. Monday morning margin calls were however based on the inflated VIX, which meant that by the time markets opened at a VIX in the 40s, participants had considerable free and surplus margin available by midday. Many were then able to double down and sell some more volatility and later recouped losses”.

Monetization criteria

The timing and quantum of monetization depend on a range of quantitative and qualitative criteria, including hedge fund and dealer positioning, “volatility of volatility” and other factors as well as fundamental context: “If the market is down 2% on the Fed not cutting rates, that is different from a nuclear bomb,” says Sidial. The strategy offers investors monthly liquidity.

Loss mitigation instruments

The loss mitigation strategy trades the whole VIX complex, including equity index derivatives and ETPs. Ambrus optimizes the strategy based on choice of tenors and strikes and closely monitors flows. The heavily retail-dominated ETPs are of particular interest because they can sometimes trade at small, and occasionally very large, discounts to NAV.

Arithmetic for creating convexity

The basic arithmetic of valuing VIX options shows how a call bought when the VIX is in the mid to high teens could multiply by 100 or more when it hits 50, 60 or 70. “The protection positions are designed to make 100-200 times profits at peak,” says Sidial. This is a very extreme example of the asymmetric and positively skewed payoff profiles that many hedge fund managers describe as “convex”.

A meeting of minds

The three founders of Ambrus met socially in the trading community, and both Sidial and Wise grew up in Long Island. They share an open-minded view that “anything can happen” in markets and named the firm Ambrus to signify immortality and create a more durable tail risk solution. Wise and Sidial handle all trading while Managing Partner, Sal Abbasi, manages the quantitative framework of risk controls, strategy optimization and development.

The “Chicago Prop Trading” style

Sidial was mentored by the legendary Chicago options trader Robert Kanter, who ran ETG in the 1990s. “He taught me a lot about markets, not only how to capture capacity-constrained edges, but also risk management, finding anomalies and he shaped the frame for tail risk hedging. The pricing of anomalies is not in line with how consistent and extreme the payoffs are hence we focused on long volatility. Some people do not believe in VIX 40, but it has happened 11 times over the past three decades. Infrequent bets with a payoff of 50 to 1 are worth taking,” points out Sidial.

At proprietary trading houses Xanthus Capital and Chimera Securities, Sidial traded strategies that continue to inform the approach at Ambrus. He also spent several years on the sell side at BMO, of which most of his time was on the exotic derivatives desk.

Wise is an exceptionally successful self-taught trader, who traded his own capital since he was at university in 2008-2009 and made impressive returns. With no institutional background, he has picked up edges in his own way and generated consistent returns from markets. Trading personal capital always focused his mind closely and conservatively on risk management and he avoided the moral hazard that can arise in some institutions. This acumen is now applied at Ambrus, informing the bleed mitigation strategy and variance monitoring, with much lower volatility targets.

Abbasi served as Head of Quantitative Credit and Fundamental Credit Technology at Citadel. He was with Citadel from 2006-2012 but was not in that role the entire time. Having worked through 2008, he shares the philosophy that “anything can happen” and has traded his personal account for some years.

Thus, the trio synthesize disciplined personal trading, proprietary trading and institutional multi-strategy hedge fund experience. Sidial sits in a New York office, Abbasi is in Chicago and Wise is in Florida (where the firm also currently has approved registration status).

Complementary trading styles

Sidial and Wise’s trading styles both mix discretionary and quantitative inputs. Sidial is mainly focused on loss mitigation while Wise is mainly focused on bleed mitigation.

Consistent trading profits

Sidial and Wise have a background and career-long experience of identifying low capacity but high alpha strategies that are unlikely to become overcrowded or see much alpha decay because they are not scalable enough to attract institutional capital.

Risk is reduced partly through capped structures but also because strategies are mostly intraday and rarely have overnight risk. Correlations between the intraday trading strategies are low, and they also show no correlation with the loss mitigation strategy. Indeed, the two strategies should be viewed as completely independent though the combination is designed to be an ideally optimized tail risk strategy.

The risk per individual trade is low but the expected value is positive, and variance is tightly controlled. Both hit rates and win: loss ratios are better than 50:50 and Wise is well versed in monitoring fluctuating levels of profitability. The strategy’s consistency is analogous to the house’s 51% edge in casinos.

Trades could revolve around hedging behaviour, term structure or intraday volume dynamics. Some strategies identify extreme overreactions and mis-pricings in single name stocks, which can over or underestimate upside or downside. “Nonetheless we do not rest on our laurels and will add new strategies. We set a high bar for adding new strategies, which need to pass a rigorous quantitative back test supervised by Sal,” says Wise.

Broker relationships and efficient execution

Though all trading is in listed plain vanilla options, optimizing execution is an extensive and delicate exercise. Ambrus uses Goldman Sachs as prime broker and trades with 11 brokers in total, including specialist option brokers and floor brokers, some of whom have low latency market access. Ambrus has coded algorithms designed to trade at the mid or better and developed other proprietary techniques for sourcing competitive pricing and liquidity. They keep a close eye on exchange clearing fee rebates to reduce overall trading costs. Some 88% of execution is electronic and 12% is agency.

Ambrus have built their own internal systems including risk systems to complement some vendor packages. They can easily monitor the “Greeks” including second order sensitivities.

Scalability

Ambrus has already raised USD 50 million without any seeder or providers of acceleration capital and currently envisages capacity is probably USD 500 million. “The alpha-rich bleed mitigation strategies are much less scalable than the loss mitigation strategies,” admits Wise.

The investor base includes US and non-US investors. The strategy can be accessed via Charles Schwab. Institutional service providers are in place: compliance is outsourced to Waystone and fund administration to NAV Consulting. Kleinberg Kaplan Wolff & Cohen are legal counsel.

Outlook

In September 2024 Ambrus remains cautiously positioned with above average amounts of loss mitigation exposure. They judge that the market is still heavily short of vega. They see US politics and civil unrest around the election as one risk factor, along with geopolitics.

A more mundane and routine variable might also catch some traders off guard. Changes in option margin requirements could turn out to be another wild card, especially for some leveraged players. Ambrus is sitting on plenty of cash and do not use leverage, but an unexpected hike in OCC (Options Clearing Corporation) margin requirements, based on stress and sensitivity tests, could be adverse for some participants. “This could add reflexivity to the next move and generate big cascading effects,” says Sidial, who is a sought-after expert for options commentary on CNBC and Bloomberg.

Summing up, Ambrus provides a rare combination: it has delivered an outstanding August 2024 return and also held steady in the prior three calendar years.