Quadratic Capital Management has launched the first exchange-traded fund that provides access to the over-the-counter fixed income options market.
The fund — the Quadratic Interest Rate Volatility and Inflation Hedge ETF, which will trade under the ticker IVOL — is designed to profit from an increase in fixed income volatility and also act as a hedge against inflation. Investors will win when the yield curve steepens, or when the spread between long-term and short-term interest rates widens, whether that comes about because long-term interest rates are rising or because short-term interest rates are falling.
“This is an ‘access ETF,’” said Nancy Davis, Quadratic’s chief investment officer, in an interview. “This is the first of its kind, period. It gives investors access to a brand new market.”
Davis said the ETF democratizes the OTC fixed income options markets, which have historically only been accessed by sophisticated investors.
“This flattens the world of investing. Anybody who wants access to this market — whether my parents, an endowment, or an insurance company — can own the ETF,” she said.
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Even so, Quadratic is pitching the fund to institutional investors as a simpler way to hedge against potential corrections in equity and real estate markets. Stock and real estate prices tend to fall when volatility increases in fixed income markets or during times when the interest rate curve is steepening.
“Why is it appealing to institutional investors? They’ll understand these options, but do they want to manage a portfolio of interest rate options?” said Davis.
Davis founded Quadratic in 2013 around her unusual style of derivatives-based macro investing. The strategy involves keeping the vast majority of her capital in cash, making investments through options and swaptions, and constantly harvesting gains. It’s meant to be a low-risk and highly uncorrelated approach.
Davis began her career at Goldman Sachs, ultimately heading credit, derivatives, and OTC trading for the firm’s proprietary trading group.