Tomorrow’s Titans 2022: Menashe Shemesh + Uriel Geller

Volatility alpha generation through multiple market regimes

The Hedge Fund Journal
Originally published on 01 August 2022
  • Menashe Shemesh, Chairman and Uriel Geller, CIO, Granite Alternative Group, Herzeliya, Israel

Israel-headquartered Granite Alternative Group has reached an inflexion point in the growth of its business: augmenting the team, adding new strategies for additional diversification and return optimisation, and rolling out multiple distribution routes to make the strategy accessible to a wider investor base.

Granite is a systematic manager seeking inefficiencies in derivatives markets. The award-winning flagship fund, Granite Alphen Capital Fund (GACF), has generated positive performance in all calendar years since inception in 2013, realised a Sharpe above 1, and is highly ranked in multiple databases.

The two founders have been trading options for more than 20 years, having started out making markets in options before pivoting the firm to asset management. Shemesh established Israeli options proprietary trader, Granite Financial Instruments Limited, in 2003 and Geller joined in 2004, having previously made markets in US options at Bear Wagner in New York. The firm started developing investment models in 2009 and tested them between 2010 and 2012 before accepting external capital in 2013 and ceasing the market making.

Their multi-strategy approach to some degree switches between risk on in stable markets and risk off in volatile markets. The flagship strategy now trades listed derivatives on equity indices, volatility, fixed income and ETFs, in the US and Europe. Since launching in 2013 with a weekly premium collection strategy, GACF has steadily broadened its suite of strategies, to include sector spreads, VIX futures and options, index collars, equity calls, and calendar spreads as well as strategic hedges and tail hedges. GACF now includes eight derivatives strategies, of which three are positively correlated to equities, three negatively correlated, and two neutral. Some strategies are long option premiums while others collect premium income, as well as a blend of bullish and bearish strategies.

Well established inefficiencies

At the simplest level, the strategies are based on well-known market anomalies, which have been well documented by decades of data. They include the volatility risk premium: the fact that implied volatility is higher than realized volatility most of the time and skew, which sees puts nearly always more expensive than calls in equity markets. Calendar spreads have also displayed some repeated historical patterns, such as mean reversion in the term structure as it swings between contango and backwardation. 

Granite’s real skill lies in how these strategies and trades are structured, risk managed, rebalanced, executed and combined in appropriate proportions to strike balances between income, protection, upside and downside under different market regimes and scenarios.

Accelerating research and innovation drive

The original strategy, selling weekly equity index premiums, was the main strategy between 2013 and 2017 and it remains the largest allocation within GACF, which is overall earning some theta or premium income in net terms, yet retains long volatility exposure. 

Sector spreads were added in 2018, VIX futures and options in 2019 and index collars in 2020. In 2021, the pace of strategy diversification and innovation accelerated, with three strategies added: equity calls, calendar spreads and additional strategic hedges. This was aided by a growing research team: “Historically, the traders did research but in the past few years dedicated programmers have been hired. The R&D effort has been ramped up with a number of in-house programmers. We have about a terabyte of exchange data and have developed very efficient backtesting query tools,” says Geller. 

The strategy additions are partly designed to raise the return target and slightly increase volatility, but also to make the strategy even more resilient to crises and corrections: between 2013 and 2018, drawdowns during equity market pullbacks peaked (in August to September 2015 and 4Q 2018), but since 2019 the drawdowns have become smaller – and the strategy has even profited during some equity market setbacks, such as March 2020, and the first half of 2022. “We added new strategies to cope with different scenarios and environments. Our aggregation of strategies is quite balanced, especially in distressed situations. Each one captures different segments and scenarios so that the total blend is balanced and fairly neutral. Correlations between the strategies remain low and stable. The result gives low volatility and low correlation,” says Shemesh.

Granite is constantly searching for new strategies, though there is no specific target for how many to add: “It all depends on whether the R&D generates a good strategy with a low correlation,” says Geller.

Existing strategies could be applied to new markets that are sufficiently liquid and operationally accessible. “Some markets, such as UK weekly options, are not liquid enough, while others, such as Asian options, would need more operational work,” says Geller. Commodities are being researched as well.

Versatile strategy suite

Drilling into some of the sub-strategies, the VIX index of implied volatility in US equities can be traded with a long or short bias, or indeed on a neutral volatility basis, and directional positions are generally paired with an S&P 500 hedge in the opposite direction. 

GACF as a whole usually has some modest delta-adjusted long exposure to equity markets, but this is also balanced against portfolio protection on the downside. Tail risk hedges can include out of the money call options on the VIX, and out of the money put options on the S&P 500. There is also some active trading of short S&P 500 futures to manage short gamma risks. The degree and type of hedging is optimized using proprietary models.

The equity markets in 2022 have seen a violent shift from growth to value investing, and Granite can exploit these sorts of trends. A long/short sector strategy uses US sector ETFs for industries such as utilities, healthcare, staples, industrials, retail and materials, to express relative value views on intra-market dynamics in terms of defensive versus cyclical sectors. 

All of the strategies, including some of the tail hedges, are profit centers, which have positive average annualized returns. They also have strong risk management in isolation: standalone drawdowns have generally been less than one standard deviation of their standalone volatility for each one. The overall GACF strategy volatility is reduced because many of the pairwise correlations amongst the eight strategies are low, near zero or negative. 

R&D drives evolution and innovation

In addition to rolling out new strategies, Granite is constantly fine tuning, honing and refining existing ones. “For instance, the sector spreads strategy has moved from long/short implementation to using put options,” says Geller.

The research process pays careful attention to data quality and data segmentation, identifying the relevant indices and volatility regimes for the task. Models are painstakingly built and backtested, and Granite cautiously expect to see live performance in pilot programs close to the backtest before allocating to a new strategy.

Multi-faceted risk management

There are multiple levels and layers of risk management. The portfolio construction amongst the eight strategies inherently controls risk by including a mix of low and negative correlations. The predominant use of option spreads also places caps and ceilings on maximum losses, and beyond that there are systematic protocols for stop-losses. There are also dynamic controls on position sizing, delta exposures, and exposure limits per strategy, asset and asset class. 

Granite has developed its own tools for risk management and stress testing, with a focal point of overnight and after market risk monitoring for gap risks. Tail hedges provide another backstop. Margin requirements overall are typically low, which is comparable to many systematic strategies such as CTAs, and lower than some relative value arbitrage strategies, which can be margin intensive.

Execution efficiency blends man and machine

Most of the strategies are rebalanced weekly, but some of them such as equity calls and collars could be rebalanced monthly or quarterly. Trading is partly done through direct market access (DMA) electronic platforms, but there is also some need for high touch, voice execution, which can include negotiating block trades with prime broker, Societe Générale, and four other brokers in Europe and the US, which give up trades to SocGen. Granite also has access to extended hours platforms for trading outside normal market hours. Granite has dedicated option traders who each have more than ten years’ experience.  

Delta hedge execution is fully automated, but most of the execution is not automated. “Our human traders are especially useful because bid/ask spreads on options can be wider than on equities or futures, and there can be less liquidity in out of the money options. We like to think of the strategy as a ‘grey box’: all systematic investment decisions are model driven, but execution allows limited discretion over time windows,” explains Geller.

Scalable global roll out across vehicles, platforms, and domiciles

All assets are in listed, exchange-traded instruments which have transparent market prices and most of the book is in options with below one week maturity. The portfolio could be liquidated in hours. This, combined with strong operational infrastructure, helps to make the strategy very scalable: Granite estimate that a few billion dollars could be run. 

In early 2022 Granite hired Julien Assous as the Group’s CEO. Assous was previously CEO of Migdal Investment Banking, and earlier CEO of IBI Brokerage, one of the biggest brokers in Israel, and has been a Director of the Tel Aviv Stock Exchange. Assous is focused on broadening Granite’s strategic collaborations, as well as building a distribution network locally and globally.    

Granite started with a Gibraltar structure, which benefits from Gibraltar’s dual regime, which can be AIFMD aligned, but also allows an opt-out of AIFMD. Granite already runs tax neutral Cayman and Delaware structures and is actively looking at other fund domiciles and multiple end markets. “Some Swiss Franc hedged certificates have been structured for the Swiss market, with one for retail and one for institutional investors, reflecting local market preferences,” says Assous.

Granite work with placement agents in Israel and Switzerland, and could be open to other such relationships elsewhere, if the right fit is found: “We would rather work with platforms that actively promote funds than those that just passively list them on the platform,” says Assous. 

Hitherto, the strategy has only been invested in by sophisticated investors, but there is potential to accept retail investors in some domiciles: “The regulator in Israel announced its intention to launch a liquid alternatives structure, which combines a hedge fund and a mutual fund, and we expect to work with strategic institutional partners to launch the strategy in this wrapper. We would use the same know-how but might structure a slightly different risk reward for retail investors,” Assous adds.

Granite is also exploring the possibility of launching a UCITS for the European market. 

Geographically, China and Hong Kong are interesting markets and closer to home in the Middle East. Dubai now has a new relationship with Israel – a free trade agreement signed in May 2022 – that could help to expedite a distribution deal. 


There are already separately managed accounts, which can offer potential for customization. Investors can mix and match amongst the strategies, and four of the eight already have standalone share classes. Granite has the operational structures and technology to facilitate this sort of customization. “It is very easy for us to offer a menu and execute on the calculation and modelling side,” says Geller. Other bespoke options include levels of leverage. “It is all adjustable, that is the beauty of trading derivatives,” says Shemesh.

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Tomorrow’s Titans 2022