Hedge funds have a response to investors’ who question why fees are so high when returns are so-so. The answer of the moment is “dispersion trading,” which according to Financial Times allows HF managers to make money on the current volatility in the market by betting on the movement of selected stocks in an index against movement of the index itself. The goal is to pick stocks that allow for the biggest difference in performance between those selections and the index. It’s a strategy not for the unsophisticated, as it can be “costly and is still difficult for the average investor to implement,” FT reports. Meanwhile, the strategy has inspired managers to call on their inner strength to discover how to best capitalize on what they already have available to them, Todd Steinberg of BNP Paribas told FT. What hedge funds have concluded in many cases, says Steinberg, is that “they already have the in-house systems and capabilities to analyze volatility and correlations.” He adds, “In order to take a view on dispersion, banks need global execution, and you need structured product flow,” noting that the biggest such trades occur on the likes of the S&P500 and Eurostoxx indices. A few banks such as Dresdner Kleinwort and Credit Suisse unit Volaris offer such volatility management strategies, and the Chicago Board of Options has a Web-based system that gives volatility dispersion traders access with data that helps hedge fund managers decided when best to go dispersion.
