{"id":2355077,"date":"2021-08-09T16:11:56","date_gmt":"2021-08-09T20:11:56","guid":{"rendered":"https:\/\/www.valuewalk.com\/?p=2355077"},"modified":"2023-05-19T10:47:19","modified_gmt":"2023-05-19T14:47:19","slug":"logica-capital-july-2021-commentary","status":"publish","type":"post","link":"https:\/\/www.valuewalk.com\/logica-capital-july-2021-commentary\/","title":{"rendered":"Logica Capital July 2021 Commentary: Value Investing For Volatility"},"content":{"rendered":"\n<p>Logica Capital <a href=\"https:\/\/www.valuewalk.com\/logica-capital-may-2021-commentary\/\">commentary<\/a> for the month ended July 2021.<\/p>\n\n\n\n\t<!-- Begin Mailigen Signup Form -->\n\t<script type=\"text\/javascript\">\n\t\tif (typeof jQuery == 'undefined') {\n\t\t\tdocument.write('<scr' + 'ipt type=\"text\/javascript\" src=\"https:\/\/list.mailigen.com\/js\/jquery.js\"><\/scr' + 'ipt>');\n\t\t}\n\t<\/script>\n\t<script language=\"javascript\" type=\"text\/javascript\" src=\"https:\/\/list.mailigen.com\/js\/scripts.js\"><\/script>\n\t<script language=\"javascript\" type=\"text\/javascript\" src=\"https:\/\/list.mailigen.com\/js\/subscribe2.js\"><\/script>\n\t<div id=\"MG-placeholder\">\n\t<style>.first{clear:both;margin-left:0}.one-third{width:31.034482758621%;float:left;margin-left:3.448275862069%}.two-thirds{width:65.51724137931%;float:left}form.ebook-styles .af-element input{border:0;border-radius:0;padding:8px}form.ebook-styles .af-element{width:220px;float:left}form.ebook-styles .af-element.buttonContainer{width:115px;float:left;margin-left: 6px;}form.ebook-styles .af-element.buttonContainer input.submit{width:115px;padding:10px 6px 8px;text-transform:uppercase;border-radius:0;border:0;font-size:15px}form.ebook-styles .af-body.af-standards input.submit{width:115px}form.ebook-styles .af-element.privacyPolicy{width:100%;font-size:12px;margin:10px auto 0}form.ebook-styles .af-element.privacyPolicy p{font-size:11px;margin-bottom:0}form.ebook-styles .af-body input.text{height:40px;padding:2px 10px !important}\n\n\tform.ebook-styles .error,\n\tform.ebook-styles #error {\n\t\tcolor:#d00;\n\t}\n\tform.ebook-styles .formfields h1,\n\tform.ebook-styles .formfields #mg-logo,\n\tform.ebook-styles .formfields #mg-footer {\n\t\tdisplay: none;\n\t}\n\tform.ebook-styles .formfields {\n\t\tfont-size: 12px;\n\t}\n\tform.ebook-styles .formfields p {\n\t\tmargin: 4px 0;\n\t}\n\t<\/style>\n<div style=\"background:#eee;display:block;overflow:hidden;margin-bottom:24px;padding:40px;\">\n<div class=\"two-thirds first\">\n<p style=\"font-size:22px;margin:0 0 10px;\">Get The Full Henry Singleton Series in PDF<\/p>\n\t<p style=\"line-height:1.4;margin-bottom:0;\">Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues<\/p>\n\t<form action=\"https:\/\/valuewalk.us4.list-manage.com\/subscribe\/post?u=c3eb7a1d092fc854772c834e0&amp;id=f6f5bdb8b5\" method=\"post\" id=\"mc-embedded-subscribe-form\" name=\"mc-embedded-subscribe-form\" class=\"validate\" target=\"_blank\" novalidate>\n <div id=\"mc_embed_signup_scroll\">\n \n\t\t\t\t<div class=\"af-element mc-field-group \">\n\t\t\t\t\t<div class=\"af-textWrap c1\"><input type=\"email\" value=\"\" placeholder='Email Address' name=\"EMAIL\" class=\"required af-element email\" id=\"mce-EMAIL\"><\/div>\n\t\t\t\t\t<div class=\"af-clear\"><\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"af-element buttonContainer\">\n\t\t\t\t\t<input type=\"submit\" value=\"Subscribe\" name=\"subscribe\" id=\"mc-embedded-subscribe\" class=\"button\">\n\t\t\t\t<\/div>\n \n \n\t<div id=\"mce-responses\" class=\"clear\">\n\t\t<div class=\"response\" id=\"mce-error-response\" style=\"display:none\"><\/div>\n\t\t<div class=\"response\" id=\"mce-success-response\" style=\"display:none\"><\/div>\n\t<\/div>    <!-- real people should not fill this in and expect good things - do not remove this or risk form bot signups-->\n    <div style=\"position: absolute; left: -5000px;\" aria-hidden=\"true\"><input type=\"text\" name=\"b_c3eb7a1d092fc854772c834e0_f6f5bdb8b5\" tabindex=\"-1\" value=\"\"><\/div>\n    \n    <\/div>\n\t<\/form>\n\t<script type='text\/javascript' src='\/\/s3.amazonaws.com\/downloads.mailchimp.com\/js\/mc-validate.js'><\/script><script type='text\/javascript'>(function($) {window.fnames = new Array(); window.ftypes = new Array();fnames[0]='EMAIL';ftypes[0]='email';}(jQuery));var $mcj = jQuery.noConflict(true);<\/script>\n<\/div>\n<div class=\"one-third\">\n<img decoding=\"async\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2017\/02\/Singleton-1.jpg\" alt=\"Henry Singleton eBook\" style=\"width:100%; height:auto\">\n<\/div><\/div><\/div><!-- End Mailigen Signup Form -->\n\n\n\n<p class=\"has-text-align-center\"><a href=\"https:\/\/valuewalkpremium.com\/q2-2021-hedge-fund-letters\/\" target=\"_blank\"><em><strong>Q2 2021 hedge fund letters, conferences and more<\/strong><\/em><\/a><\/p>\n\n\n\n<div class=\"ca-widget\" data-token=\"f5c8f36f2f97\">&nbsp;<\/div>\n\n\n\n<p><strong><u>Logica Absolute Return<\/u><\/strong><strong> (LAR)<\/strong> - Upside\/Downside Convexity - No Correlation<\/p>\n\n\n\n<ul>\n<li><em>Tactical\/dynamic <strong>balanced<\/strong> Put\/Call allocation - Straddle<\/em><\/li>\n<\/ul>\n\n\n\n<p><strong><u>Logica Tail Risk<\/u><\/strong><strong> (LTR)<\/strong> - Max Downside Convexity \u2013 Strong Negative Correlation<\/p>\n\n\n\n<ul>\n<li><em>Tactical\/dynamic <strong>downside tilted<\/strong> Put\/Call allocation - Ratio Straddle<\/em><\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1.png\"><img decoding=\"async\" width=\"1200\" height=\"556\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355127\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1-300x139.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1-768x356.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-1-696x322.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p><strong><em>Summary: <\/em><\/strong><strong><em>Equity markets continue to charge ahead with seemingly little resistance, although factor rotations continue to play out under the hood with the <a href=\"https:\/\/www.valuewalk.com\/indexsp-inx\/\">S&amp;P 500<\/a> and Nasdaq 100 both up more than 2% while the Russell 2000 was down more than 3.5% in July. VIX\/Implied Volatility provided a bit of a tailwind for a change, ringing its first positive month since January 2021.<\/em><\/strong><\/p>\n\n\n\n<ol>\n<li><em>Returns are Gross of fees. LAR Fund +1.98% (net), LTR Fund +0.87% for July 2021<\/em><\/li>\n\n\n\n<li><em>Na\u00efve Straddle Return: a 1.5 month out, S&amp;P 500 at-the-money put and call bought on the final trading day of prior month and sold on the final trading day of current month. This return on premium is divided by a factor of 6 to be comparable to Logica\u2019s typical AUM-to-premium ratio.<\/em><\/li>\n\n\n\n<li><em>Na\u00efve Ratio Straddle Return: a 1.5 month out, S&amp;P 500 at-the-money put and at-the-money call (divided by 2) bought on the final trading day of prior month and sold on the final trading day of current month. This return on premium is divided by a factor of 6 to be comparable to Logica\u2019s typical AUM-to-premium ratio.<\/em><\/li>\n<\/ol>\n\n\n\n<blockquote class=\"wp-block-quote\">\n<p><strong><em>\"And when it rains<\/em><\/strong><\/p>\n\n\n\n<p><strong><em>You're shining down for me<\/em><\/strong><\/p>\n\n\n\n<p><strong><em>And I just can't get enough<\/em><\/strong><\/p>\n\n\n\n<p><strong><em>And I just can't get enough\"<\/em><\/strong><\/p>\n\n\n\n<p><em>-Depeche Mode<\/em><\/p>\n<\/blockquote>\n\n\n\n<h2 class=\"wp-block-heading\">Commentary &amp; Portfolio Return Attribution<\/h2>\n\n\n\n<p>For many months (perhaps even a year now), like a broken record, we\u2019ve been telling anyone that would listen that opportunities in the volatility space only get better the longer vol deterioration continues, and relatedly, the cheaper it gets (think of it as value investing for <a href=\"https:\/\/www.valuewalk.com\/doug-kass-code-red-chaos-in-the-market\/\">volatility<\/a>).\u00a0<\/p>\n\n\n\n<p>Though there was actually some <em>appreciation <\/em>in implied vol this month (albeit a meager +2.4 points on VIX), the current environment has presented a perfect example of how simply removing\/reducing the barrier of significant vol deterioration has really helped our strategy flourish.<\/p>\n\n\n\n<p>Over each of the past 4 months (during which LAR has generated a positive return of +5.3%) the largest volatility headwind we experienced was during May (VIX -1.9 points). While vol moving down a couple points certainly doesn\u2019t <em>help<\/em>, contrasting this with the environment with the latter half of 2020 obviously reveals a completely different world. Recall that from April 2020 through the end of 2020, VIX experienced down months of -29.4, -6.6, -6.0, and -17.5 points.<\/p>\n\n\n\n<p>To put a cap on it: when implied volatility levels are decently low relative to historical, there is far greater probability one will experience a month like this, where the underlying market (S&amp;P 500) appreciates while implied volatility <em>also <\/em>appreciates. This should be a huge boon to anyone holding long equity and long vol exposures, and why we continue to beat a dead horse about the benefits of investing in vol when it\u2019s lower (which, ironically, is when you think you need it the least!).<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2.png\"><img decoding=\"async\" width=\"1200\" height=\"706\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355126\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2-300x177.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2-768x452.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-2-696x409.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3.png\"><img decoding=\"async\" width=\"1200\" height=\"711\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355125\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3-300x178.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3-768x455.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-3-696x412.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p>For this month, we are most satisfied by the performance of our <strong>\u201cfast scalping\u201d S&amp;P Puts module.<\/strong> This process is known as \u201cgamma scalping\u201d and is our primary mechanism for monetizing profit along the way in order to mitigate the cost of carry. July is a nice example of the value of this process, as visualized in our scatter plots further down. <\/p>\n\n\n\n<p>Intra-month volatility on the S&amp;P 500 was up slightly this month (albeit, still nothing to write home about), which gave us ample opportunities to scalp. Any time we can have a long S&amp;P Puts module come out positive on a month where the underlying was <strong>up <\/strong>\u2013 much less to the tune of +2.3% - is a major coup.\u00a0 Simply said, we achieved a positive output while being fully short an underlying that rose.<\/p>\n\n\n\n<p>Elsewhere, most modules ran as expected, e.g., Calls went up! Most notably, we saw significant contribution from our <strong>Macro Overlay modules<\/strong>, bringing them positive YTD after a somewhat painful ride earlier this year. We wrote extensively about that experience in a prior letter, particularly with regards to substantive downside moves in <a href=\"https:\/\/www.valuewalk.com\/gold-price\/\">Gold<\/a> and Treasuries, and hope to see a continuation of the reversal story through the end of August.<\/p>\n\n\n\n<p><strong>Single stock calls<\/strong> were largely buoyed by increased exposure to growth\/quality. Our momentum and diversifier exposures lagged the S&amp;P this month, but we remain happy about being exposed to idiosyncratic bets across several \u201cfactors.\u201d We see great benefit in taking concentrated convex bets but doing so across a more diverse range of exposures.<\/p>\n\n\n\n<p>Both strategies nicely outpaced a na\u00efve straddle in July. We continually see how a na\u00efvely implemented (think \u201cbuy and hold\u201d) strategy consistently fails to hold on to gains when volatility spikes:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355124\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-4-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355123\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-5-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p>Year-to-Date, we see the same phenomenon:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-6.png\"><img decoding=\"async\" width=\"2700\" height=\"1350\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-6.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355122\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-6.png 2700w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-6-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-6-2000x1000.png 2000w\" sizes=\"(max-width: 2700px) 100vw, 2700px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355121\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-7-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p>Digging deeper, our daily distribution of returns was as expected, with one interesting difference: we were able to slightly outperform our historical distribution at the extremes, namely, on the best and worst S&amp;P 500 days over the month. Recall that our fast scalping S&amp;P Puts module helped to monetize profits, while our Calls naturally participated in the market\u2019s climb. The big point being that both our strategies were positive on both \u201cextreme\u201d days:<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8.png\"><img decoding=\"async\" width=\"1156\" height=\"212\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355120\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8.png 1156w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8-300x55.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8-768x141.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8-696x128.png 696w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-8-1068x196.png 1068w\" sizes=\"(max-width: 1156px) 100vw, 1156px\" \/><\/a><\/figure><\/div>\n\n\n<p>Visually, we can see these outcomes (the two most distant dots on either side):<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355119\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9-696x348.png 696w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9-1068x534.png 1068w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-9-840x420.png 840w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-10.png\"><img decoding=\"async\" width=\"2700\" height=\"1350\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-10.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355118\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-10.png 2700w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-10-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-10-2000x1000.png 2000w\" sizes=\"(max-width: 2700px) 100vw, 2700px\" \/><\/a><\/figure><\/div>\n\n\n<blockquote class=\"wp-block-quote\">\n<p><strong><em>\u201cOne pays for everything; the trick is not to pay too much of anything for anything.\u201d <\/em><\/strong>- <em>John Steinbeck<\/em><\/p>\n<\/blockquote>\n\n\n\n<p>We often use the phrase \u201cthere\u2019s no free lunch.\u201d This is a helpful way to think about the world because it has us constantly evaluating if what we\u2019re doing is sustainable long term \u2013 especially when it comes to trading models. A question we get asked most often is to explain how we pay for the cost of holding long volatility. <\/p>\n\n\n\n<p>And the reason for the constant query, of course, is because most understand the <em>benefits<\/em> of being long vol: benefiting from uncertainty, performing well in times of crisis, and helping to optimize a portfolio\u2019s long-term geometric return, just to name a few.In the vol space, most approach the problem of carrying long vol exposure by shorting volatility at some other place on the volatility surface (either moneyness or expiry\/tenor). <\/p>\n\n\n\n<p>While this is a viable approach, it carries with it several issues. First and foremost, it is counter-thesis; one is literally short the thing they most want to be long (volatility!), and hence introduce the worst kind of risk -- the exact opposite outcome. Secondly, this style typically increases the complexity of managing the book, often causing one to initiate <em>new<\/em> positions to offset <em>existing<\/em> ones. <\/p>\n\n\n\n<p>This makes it more time intensive, and worse, introduces more variables to continually account for (with multiple legs of long and short options, one must be much more attune to second, third and higher order derivatives, which are dynamic exposures <em>themselves<\/em> that can change dramatically from minute to minute).<\/p>\n\n\n\n<p>Whenever one adds variables or additional components to a model, complexity increases at a non-linear rate. Essentially, one moves from trying to juggle 2 balls, to 3 balls, to 10 balls, etc\u2026where juggling 10 balls is not just <em>twice<\/em> as hard as juggling 5, it\u2019s exponentially harder. <\/p>\n\n\n\n<p>One moves from something that is difficult, but doable with enough practice (juggling 5 balls), to something that is nearly impossible (juggling 10 balls; of note, the world record is 11 balls<sup>1<\/sup>). This thought process is to illustrate the importance of reducing complexity, which in investing, will <strong>reduce both the path dependency and the margin of error.<\/strong><\/p>\n\n\n\n<p>With that said, and as our investors are aware by now, instead of shorting volatility to pay for our long volatility, we opt instead to modulate our delta exposure so that most days we are intentionally <em>not<\/em> delta neutral at the portfolio level (depending on the strategy\/module in question, this may be, on average, a positive, zero, or negative delta exposure).<\/p>\n\n\n\n<p><em>(As an aside, we also modulate our vega [and vomma\/volga] exposures, which are the amount of money we will make\/lose given each point increase\/decrease in volatility. For now, let\u2019s just stay with delta.)<\/em><\/p>\n\n\n\n<p>This modulation allows us to deal with some portion of volatility headwinds by scalping profits along the way. The wonderful thing about this is implied above: <strong>we have simplified our pieces and so our path is more certain.<\/strong> <\/p>\n\n\n\n<p>If we were to tilt our delta positive, for example, we are taking the <em>defined <\/em>risk of not participating <em>immediately<\/em> upon a downside move in the underlying. Of course, the beauty of defined risks and discrete paths is that one does not have to change exposures in real-time (and is not as subject to gap risk): if we wake up tomorrow and the S&amp;P 500 is down 5%, while we of course are not assured any <em>specific<\/em> magnitude of profit, we are <em>very<\/em> comfortable with the likelihood that even at a mild positive delta tilt, our Call exposure will have quickly dwindled, while our Put exposure will have increased dramatically. <\/p>\n\n\n\n<p>On the other hand, if one is delta neutral via <em>shorting<\/em> an at-the-money Put option while being <em>long<\/em> a 20% out-of-the-money Put option (a Put spread), they are very much less certain as to when the OTM Put option <em>gain<\/em> will overtake the ATM Put option <em>loss<\/em> \u2013 and get less and less certain as the number of legs in that spread increase, as at that point, the <strong>specific path the underlying takes<\/strong> has a much larger effect. With some option spreads, one can oscillate between having a long and short volatility exposure depending on how the underlying moves. Added uncertainty is exactly what we don\u2019t want.<\/p>\n\n\n\n<p>As to the broad question, how can one possibly make enough <a href=\"https:\/\/www.valuewalk.com\/bofe-no-immediate-easing-off-cheap-money\/\">money<\/a> to offer this improved path independence (and all the other benefits of pure long vol) without spreads? Said differently, what other risk is taken to achieve this purity of long vol? Obviously, any strategy that has any hope of making money needs to take risk <em>somewhere<\/em>! The simple answer, as shared above in describing our modulation strategy, is delta risk. If we are not willing to take counter-thesis risk (short vol), then we must take some directional risk, i.e., delta exposure (whether long or short).<\/p>\n\n\n\n<p>But ironically, delta risk, especially when bounded, is not as much risk as one might think - if one is exclusively long volatility. We\u2019ve talked ad nauseum about how a volatility <em>headwind<\/em> is so difficult to overcome, and how most of our efforts are geared toward this singular issue (especially given the environment of late 2020\/early 2021). <\/p>\n\n\n\n<p>But on the heels of this month, we demonstrate below how beneficial a volatility <em>tailwind<\/em> can be. With a delta neutral straddle exposure, we can see the PnL profile dramatically moving in our favor with an 8.5 point increase in volatility (this illustration is simply the reverse of a prior 8.5 point volatility <em>decay<\/em> chart we included in our March 2021 letter that looked closely at vol deterioration):<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355117\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11-696x348.png 696w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11-1068x534.png 1068w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-11-840x420.png 840w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p>Now, for illustration purposes, we show a long delta tilted straddle: long 1.3 Calls for every 1 Put. Hence, no longer delta neutral. We see that with a modest volatility tailwind of +8.5 points \u2013 as would surely be expected during a <a href=\"https:\/\/www.valuewalk.com\/fintech-super-apps-change-money-forever\/\">crisis<\/a> (recall that during February 2020, VIX increased 24.6 points, and then another 45 points to the peak in March 2020)\u2013 even a long-delta tilted straddle is in <strong>very <\/strong>good shape given a significant down move in the underlying.<\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355116\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-12-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p>Looking at these scenarios together, we illustrate that we would of course give up some initial profit on the downside if we had a positive delta tilt at that moment in time. But one must pick their poison! As every strategy of every type needs to take risk somewhere, rather than shorting the very thing that we eagerly want to be <em>long<\/em>, we prefer to remain wholly long volatility <strong>at all times, and across all possible paths.<\/strong><\/p>\n\n\n\n<p><strong><u>References<\/u><\/strong><\/p>\n\n\n\n<ol>\n<li><a href=\"https:\/\/www.guinnessworldrecords.com\/world-records\/most-balls-juggled\" rel=\"nofollow\" target=\"_blank\">https:\/\/www.guinnessworldrecords.com\/world-records\/most-balls-juggled<\/a><\/li>\n<\/ol>\n\n\n\n<p><strong><u>In the News<\/u><\/strong><\/p>\n\n\n\n<p>Hedge Fund Alert featured Logica\u2019s Tail Risk strategy launch in its recent issue. See below for the link to the article:<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/logicafunds.us11.list-manage.com\/track\/click?u=078f5f5018c9b9aa282930aae&amp;id=4abeadfd7d&amp;e=453a498da9\" rel=\"nofollow\" target=\"_blank\">Logica Capital - Hedge Fund Alert<\/a><\/strong><\/p>\n\n\n\n<p><strong><u>Logica Strategy Details<\/u><\/strong><\/p>\n\n\n\n<p>Note: We have comprehensive statistics and metrics available for our <a href=\"https:\/\/www.valuewalk.com\/evaluate-strategic-partners-shared-sustainability-goals\/\">strategies<\/a>, but only include a select few to highlight what we believe is our most valuable contribution to any larger portfolio.<\/p>\n\n\n\n<p><em>If you would like to learn more about our strategies, please reach out to:<\/em><\/p>\n\n\n\n<p><strong>Steven Greenblatt<\/strong><\/p>\n\n\n\n<p><a href=\"mailto:greenblatt@logicafunds.com\"><strong>greenblatt@logicafunds.com<\/strong><\/a><\/p>\n\n\n\n<p><strong>424-652-9520<\/strong><\/p>\n\n\n\n<p>Follow Wayne on Twitter @WayneHimelsein<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Logica Absolute Return<\/h2>\n\n\n\n<p><em>2015-2019 stats &amp; grid, reconstitution of live sub-strategies normalized to 16% annualized volatility<br \/><\/em><\/p>\n\n\n\n<p><em>2005 to present growth of $1000 chart, simulation<br \/><\/em><\/p>\n\n\n\n<p><em>Jan 2020 live<\/em><\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13.png\"><img decoding=\"async\" width=\"1200\" height=\"337\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355115\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13-300x84.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13-768x216.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-13-696x195.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14.png\"><img decoding=\"async\" width=\"1200\" height=\"336\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355114\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14-300x84.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14-768x215.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14-696x195.png 696w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-14-1068x299.png 1068w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355113\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-15-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p><em>*HFRX Indices have been scaled up to 15% annualized volatility to be comparable to LAR and S&amp;P 500.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Logica Tail Risk<\/h2>\n\n\n\n<p><em>2015-2019 stats &amp; grid, reconstitution of live sub-strategies normalized to 16% annualized volatility<br \/><\/em><\/p>\n\n\n\n<p><em>2005 to present growth of $1000 chart, simulation<br \/><\/em><\/p>\n\n\n\n<p><em>Jan 2020 live<\/em><\/p>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-16.png\"><img decoding=\"async\" width=\"1200\" height=\"282\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-16.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355112\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-16.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-16-300x71.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-16-768x180.png 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17.png\"><img decoding=\"async\" width=\"1200\" height=\"330\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355111\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17-300x83.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17-768x211.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17-696x191.png 696w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-17-1068x294.png 1068w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter\"><a href=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18.png\"><img decoding=\"async\" width=\"1200\" height=\"600\" src=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18.png\" alt=\"Logica July 2021 \" class=\"wp-image-2355110\" srcset=\"https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18.png 1200w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18-300x150.png 300w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18-768x384.png 768w, https:\/\/www.valuewalk.com\/wp-content\/uploads\/2021\/08\/Logica-July-2021-18-696x348.png 696w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/figure><\/div>\n\n\n<p><em>*EHTR Index has been scaled up to 17% annualized volatility to be comparable to LTR.<\/em><\/p>\n ","protected":false},"excerpt":{"rendered":"<p>Logica Capital commentary for the month ended July 2021. Q2 2021 hedge fund letters, conferences and more &nbsp; Logica Absolute &#8230; <a title=\"Logica Capital July 2021 Commentary: Value Investing For Volatility\" class=\"read-more\" href=\"https:\/\/www.valuewalk.com\/logica-capital-july-2021-commentary\/\" aria-label=\"More on Logica Capital July 2021 Commentary: Value Investing For Volatility\">Read more<\/a><\/p>\n","protected":false},"author":19164,"featured_media":2463976,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[6640],"tags":[645498],"states":[],"acf":[],"modified_by":"Umair Tariq","_links":{"self":[{"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/posts\/2355077"}],"collection":[{"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/users\/19164"}],"replies":[{"embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/comments?post=2355077"}],"version-history":[{"count":1,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/posts\/2355077\/revisions"}],"predecessor-version":[{"id":2465593,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/posts\/2355077\/revisions\/2465593"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/media\/2463976"}],"wp:attachment":[{"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/media?parent=2355077"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/categories?post=2355077"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/tags?post=2355077"},{"taxonomy":"states","embeddable":true,"href":"https:\/\/www.valuewalk.com\/wp-json\/wp\/v2\/states?post=2355077"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}