anyone know what Volatility hedge funds are?

Hi guys,

just out of curiosity, do u know how volatility hedge funds make their money?

I know they benefit from the voalitity of the market...however, I thought that this means that they buy and sell securities at a very short term basis...

However, after trying to google voltatility hedge fund info as much as I can; from what little I found, its said that they buy securities when there is high volatility, and sell where there is not...how do u make money off of that? thanks

One way to play volatility is through the options market. Buying a straddle (long both a put and call option) would be profitable if price moves enough in either direction to more than offset the cost of the two contracts. Selling volatility is done by writing the two contracts instead of buying them, and is profitable if price stays in a certain range during the life of the contracts. I would imagine this can be done with futures too.

There are other derivatives which can be traded as well.

Forward contracts
Options
Swaptions
etc.

There are also special hedging strategies like strangle, straddle, butterfly, etc, which are all used by these funds. Wikipedia "Option strategies" and there should be plenty of volatility-based strategies.

Ditto - the most common way to trade volatility in the FX market is using options, but same would go true for most other markets.

If you're expecting an increase in volatility, buy strangles or straddles. If you're expecting a decline in volatility, buy a butterfly or sell and iron condor. You could also trade other option derivatives, like swaptions, like Raygun was saying.

Alot of people also trade the VIX itself, which is an index of volatility that tracks the equity markets. And that too, has derivates on it, which can also be traded.

If you're looking to measure volatility and breakouts on any chart one of the easier ways, but not so scientific, is to use the fractal dimension index or the choppiness index. They're pretty good telltales of what's on the way. Most people use various calculations of implied and historical volatility, however, found buried in the Black Scholes formula, etc.

I dont know off the top of my head any particular hedge funds that trade volatility exclusively but I'm sure they're out there. Regardless a lot of regular long/short equity funds and macro guys use volatility trading to diversify their strategies or to curb any naked risk. Very common and many times a little easier to predict (I find atleast).