Eton Park Capital’s 2014 Q2 investor letter revealed that the fund has been taking advantage of the low volatility environment before the recent market crash. Eton Park Capital was founded 10 years ago by Goldman alum Eric Mindich. We will reveal Eton Park Capital‘s 2014 returns at the end of this article. First, we will share the section where they described how they are using derivatives in case volatility jumps:
“The continued decline in implied volatility towards multi-year lows across a wide range of asset classes has presented a broad array of opportunities for us and has enabled us to integrate derivatives into our portfolio in a more robust way than we have in a long time. We are finding attractive opportunities to augment our fundamental equity positions to capture additional upside in risk-defined ways, as well as to protect the downside for the overall portfolio in an efficient manner. Current pricing allows us to buy longer-dated volatility for some of our fundamental positions, which provides a particularly attractive risk/reward as there are many factors that could cause volatility to rise over this longer time horizon. In our view, volatility could rise in either an up or down market, and even if implied volatility does not increase, longer-dated options are very cheap relative to their expected value based on our fundamental scenario analysis.
Within FX, implied volatility of G10 FX is at the lowest 1% of historical levels despite major central bank policies diverging for the first time in years. This has allowed us to maintain our bearish exposure to the Euro in long-dated option form, which has modest carrying costs, while retaining the potential to generate greater payouts if it should weaken further.
With equity volatility close to decade lows, we have been increasing, via risk-defined options, select fundamental positions that are approaching their full size in one delta form. In several situations, our scenario analysis indicates a far wider range of outcomes than implied by options pricing. Though day-to-day realized volatility may remain low, the longer-term point-to-point stock price could still move considerably, creating attractive payoff profiles. Two recent examples are Cheniere and Williams, where our strong fundamental views and the lower implied volatility created attractive investment opportunities. In these cases, we purchased call spreads in both companies with ultimate payouts of five to six times the premium invested. Low implied volatility levels have also provided interesting opportunities ahead of macroeconomic events, such as the June ECB meeting and nonfarm payrolls data release, as well as in Asian indices where the structured products overhang on long-dated volatility presents attractively priced asymmetric options structures.
Our derivatives and fundamental teams continue to work closely together to identify a broad array of names and themes where we can create or enhance value through the use of derivatives during this period of low volatility.”
Eric Mindich’s Eton Park Capital produced very small gains during the first half of this year. Their main portfolio returned 1.12% during the second quarter and 1.42% during the first half.