Ultimately, wherever we are innovating, what we care about is that we can hedge all of these innovations Hichem Souli, BofA BofA’s fix is a high-frequency rebalancing technique – so-called ‘fast convergence’ technology – that swells the number of observations and bolsters the rebalancing opportunities from just 20 to hundreds, or even thousands depending on the preferred fixing period. This allows the index to quickly lever up or down in response to intraday shifts, stabilising short- as well as long-term volatility.
There’s a balance to be struck between the number of observations and trading costs – the first live iteration uses multiple intraday fixes, while a big data algorithm aims to maximise execution quality. Back-tests show the approach can slash short-term vol-of-vol three-fold, while gap risk can be reduced by as much as 70% depending on the speed of the algorithm, Souli says. The new approach also delivered 1.7 percentage points of improvement when compared to a traditional vol target index – again, in back-tests.
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