Frequently Asked Questions

Zero Delta’s Alpha

  • Zero Delta looks for relative value strategies focused in the volatility space. They typically have a long vol bias but are absolute return in nature and utilize position structure to produce asymmetrical returns with exceptional risk-reward characteristics. Strategies use both machine and human inputs, and a repeatable process, to profit from structural inefficiencies in the market.

  • Kris Gilboy and Gary Selz were both portfolio managers in single-stock relative value equity volatility arbitrage at proprietary trading firms their whole careers. With over 40 combined years in the derivative markets they have the rare ability to understand the nuances, risks, and pitfalls of these niche strategies.

  • Zero Delta’s strategies are non directional in nature with limited correlation to broader indices.  ZD’s strategies can be sensitive to VIX levels, but each has idiosyncratic risks and rewards and perform differently depending on market characteristics. With ZD’s nuanced understanding of each, ZD positions the portfolio to best perform in all market environments.

  • Zero Delta’s strategies are robust and do well in most market environments.  However, ZD expects outperformance in trending stock and volatility regimes with elevated VIX levels or in highly liquid markets with high option and stock volumes. Slow grinding up markets with low VIX levels combined with reduced volumes are more difficult.

Zero Delta Process

  • In addition to Zero Delta’s focus on relative value strategies in the volatility space, ZD targets emerging fund managers who break away from reputationally strong proprietary trading firms. These managers have extensive experience with their repeatable strategies in an environment of putting risk management and capital preservation above returns.  Audited track records are nice, however they are not a prerequisite for ZD and we sometimes choose to be day one fund investors.  In addition, ZD shys away from all “asset gatherers” and selects funds that are small (under $100mm AUM), with limited capacity, and a significant percentage of manager net worth invested alongside.

  • Zero Delta shies away from traditional channels such as databases, conferences, and cap-intro teams.  Since our managers’ focus is on providing alpha and not asset gathering, they often don’t show up in these searches. Instead, ZD utilizes its network of traders, technologists, preferred brokers, and certain service providers to find new managers or let ZD know when a trader might have broken away from their current firm. This is part of the secret sauce.

  • Zero Delta completes extensive performance and back office diligence.  This includes verifying returns, speaking with auditors and fund administrators, background checks on the managers and traders, and reviewing structures with lawyers and other service providers. In addition, ZD is aware of other operational risks with prime brokers, order management and execution systems, and other far-left tail risks. ZD makes sure all of the funds are aware of these potential issues.

Risks

  • In addition to Zero Delta’s focus on relative value strategies in the volatility space, ZD targets emerging fund managers who break away from reputationally strong proprietary trading firms. These managers have extensive experience with their repeatable strategies in an environment of putting risk management and capital preservation above returns.  Audited track records are nice, however they are not a prerequisite for ZD and we sometimes choose to be day one fund investors.  In addition, ZD shys away from all “asset gatherers” and selects funds that are small (under $100mm AUM), with limited capacity, and a significant percentage of manager net worth invested alongside.

  • In volatility strategies, having a prime broker that understands the nuances of the strategy and is able to quantify the risks and calculate the margin requirements is key.  For this reason Zero Delta’s managers typically clear their trades at Goldman Sachs, APEX or ABN Amro.  Most of our manager teams are small and don’t employ full time back office professionals, but some do use third parties to help them with these functions. Unfortunately, with the high turnover in the strategies, and the operational risks associated with multiple accounts, ZD’s managers do not run SMAs.

  • Each underlying manager trades a different strategy or product, which reduces convergence. Zero Delta’s managers also have idiosyncratic opportunities, so they will typically not be exposed in the same way in individual securities or products. It is ZD’s responsibility to make sure that overlap between strategies is maintained and they each are accretive to risk adjusted performance.

Structure of Zero Delta

  • The vast majority of Zero Delta’s managers only accept investors as LPs and do not run separately managed accounts. ZD’s managers prefer to focus on providing alpha and not the operational risk of running multiple accounts in a high transaction and complicated strategy. ZD views this as an advantage, as more time is spent on managing the portfolio and provides us access to managers that our often larger SMA competitors can’t access.

  • Many multi-manager groups need to allocate too many dollars and these underlying managers are capacity constrained. In addition, if the manager takes one large investor, or goes in-house, they often lose autonomy and their family and friends may lose the ability to invest.  This flexibility is very important to our underlying managers.

  • Zero Delta is a LP investor in our underlying funds so to protect all ZD investors we need to match their liquidity.  ZD will always try to provide more liquidity than the official terms state.

  • Although Zero Delta thinks of returns on a net basis, we are aware of certain investors' mindset around fees.  With ZD, you are paying for our extensive expertise in volatility strategies and our ability to source and evaluate hundreds of under the radar and niche managers. The result is an opportunity to access a unique and exclusive portfolio of funds, many of which are closed to new investors.  In addition, ZD works to keep costs low by implementing a 1% expense cap and negotiatIng for reduced fees from our emerging managers.

Capacity Constraints

  • Zero Delta’s underlying managers are generally capacity constrained around $100mm.  However, some can only effectively manage $50mm while others can scale to $300mm. Currently the average AUM of the underlying funds stands at $75mm. Zero Delta only foresees 10-12 managers meeting our criteria so in order to keep a balanced portfolio this limits the capacity of ZD to $250mm-300mm.