The Fund had its two worst weeks since inception with the close of August contracts. We lost 12.87% last week, which followed a 11.44% loss the previous week. The good thing about trading one month duration contracts is that the pain is over. All bad assets have expired and are no longer on our books. VPAG is now fully invested in September contracts, with all positions well within acceptable risk parameters. Expect a slight dip this week followed by gains through expiration on 9/19.
Our big losses came in the currency market, with the US dollar posting its largest two week gain in over 37 years. This drove an 8% devaluation of the euro and big movements in commodities. We lost three seperate euro bets, an agricultural commodities bet, long-term bond holdings, and even a semiconductor stock index. Despite a good deal of diversification, the assets in our portfolio exhibited greater correlation coupling under stress than was desired. As an example, strong dollar apprecation slammed commodities (agricultural, in our case), which led stock markets higher through general exuberance about a potential US economic rebound.
Risk reduction practices of rolling out strikes in face of rapidly moving asset prices worked very much against us this time. As the euro dropped we moved out our option strikes three times, each time hoping to recover short term losses, but actually exposing ourselves to deeper losses.
In response to these mistakes we have modified our risk management approach and reallocated the portfolio to exploit increased volatility in certain assets. As an example, natural gas implied volatility is 54%, whereas long-term returns have demonstrated 45% volatility. Selling options enables us to take advantage of higher than normal contract premiums. This is also true of oil, euro, and even utility sector stocks.
Additionally, we now have protective straddles on our riskiest assets, i.e. euro and financial sector stocks. Currencies and financials are the riskiest assets in our portfolio, so we opened our own reinsurance policies, i.e. we bought additional long strike options to reduce exposure. Finally, we are holding 20% of assets in the form of cash to enable flexibility in exiting positions as they become riskier.
As an added risk management measure, we will be monitoring the portfolio for daily imbalances in Greeks. The goal is a minimal delta and gamma portfolio, with minor exceptions for limited directional bets. So far so good in this category.
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