DM Manager Series – Runestone Capital

For the next installation of our DarcMatter Manager Series, we wanted to highlight another great fund raising capital on DM: Runestone Capital. The firm’s U,S, Head of Sales and Marketing, Gregory Sperrazza, shares some highlights of his firm, strategy, and team, to give you some more insight into the fund’s creation and development.

For more information, visit  Runestone Capital’s Fund Profile here on DarcMatter. 

What is the history and background of your company, principals and funds?

Runestone Capital was founded in 2014 in London to identify unique investment opportunities with superior risk adjusted performance. With over 30 years’ of investment experience, Founders, Rune Madsen and Rasmus Andersen have worked together since 2008 at Morgan Stanley and Credit Suisse. The firm specializes in quantitative and qualitative strategies based on volatility. The firm’s back-tested and proprietary active management models are designed for institutional and private investors seeking alpha-driven returns. The strategy aims to deliver in excess of 20 percent net annualized returns over a cycle, regardless of market conditions. The fund returns have shown to be non-correlated to both equity market and volatility itself. Since inception, the fund has outperformed its peer group of volatility funds, CTA’s and global hedge funds. In November of 2017, Runestone won the highly prestigious EuroHedge Emerging Manager Award in Macro, CTA & Volatility category.

How is your fund differentiated from other alternative strategies?

The strategy aims to profit from capturing movements in volatility, primarily related to the Chicago Board Options Exchange Market Volatility Index (VIX) futures. It is a dedicated pure volatility strategy, i.e. it will take long or short positions in volatility, based on quantitative models and statistical probabilities. One of our key differentiators is that the fund has provided non-correlated returns to equity markets with a positive skew (larger up-months than down-months and more frequent positive returns). It has performed well in different market conditions, which should lower overall volatility if allocated to a well-diversified portfolio. The fund does not require a rising or falling market in order to generate returns. Simply speaking, the fund buys or sell US Equity Index Volatility based on statistical probabilities on a 1-day forward basis. The strategy might not be intuitive at first glance as it is very different from what most investors perceive a volatility fund to be, but this is one of the key qualities of the fund as it is unique. The strategy is deployed in an undercrowded and commonly misunderstood asset class, which improves the return potential. Runestone Capital was launched because it was the most attractive risk-reward strategy the managers had seen in their careers, and since there are very few comparable funds available.

Please explain the investment process for the strategy.

The strategy is based on a set of quantitative models constructed to predict volatility moves 1-day forward. The models’ output generates both the direction (long, short or spread) as well as the size (0-200%) of the position for the following day. The models are constructed to work over a cycle, not a pre-set market condition. The main objective of the fund is to maximize risk-adjusted returns and hence risk management is key for Runestone Capital.

The risk management process can most easily be explained by four main levels:

1. The model itself has built-in risk management using factors that influence the sizing of positions but not direction, e.g. high expected vol-of-vol might reduce positioning at the outset of the trading day
2. Conditional probabilities are used to reduce position size if probabilities have changed to the downside throughout the day
3. Hard-stop levels to cap single day losses at 5%, however losses of that magnitude have not occurred (despite large intra-day moves in volatility) due to tighter discretionary stops
4. Volatility trades almost 24 hours a day and since the portfolio managers are not in front of the screens during nights, the funds’ overnight exposure is capped at 50% of capital. Historically, the overnight exposure has rarely been above 25% and has during 2017 been less than 3%

As mentioned previously, the model is focused on risk-adjusted returns, not risk-elimination. Hence, short term swings will be allowed in order to obtain long term gains. Since inception the worst 5% of days with losses has ranged from 1.41% to -3.25% while the best 5% has ranged from +1.39% to +4.19%.

How does your fund complement an investment portfolio?

Due to the lack of correlation within the strategy and the positive absolute return the fund has generated there are many advantages to adding Runestone to a well-diversified portfolio. Since the fund’s inception the strategy has impressively continued to show key characteristics that benefit portfolios including asset diversification, beta reduction and positive performance skew. When looking back to 2006, the strategy’s monthly performance has had a correlation to the S&P of only 3%, -22% to HFRX Hedge Funds and -2% to U.S. treasuries. Importantly, unlike other asset classes in volatility , past returns do not affect the potential for future gains and the fund is neutralizing to overall volatility in a multi-asset class portfolio.

Are you looking at any particularly attractive opportunities right now?

In our view, volatility is an emerging, undercrowded and commonly misunderstood asset class with significant investment opportunities. It is the only asset class we focus on and Runestone Capital is well positioned with industry-leading risk-adjusted performance. Perhaps most interesting about volatility is that we consider the opportunity set to be perpetual, irrespective of high or low volatility levels, since volatility usually has constant fluctuations intra-month even when volatility is flat month-over-month. As a long/short manager in that space that makes us rather agnostic to overall equity market direction as we can take advantage of both sides of the volatility trade.

How do you view the overarching investment environment for 2018?

Our thoughts are perhaps best summarized in the recent interview of our portfolio and co-founder Madsen on CNBC: CNBC Squawk Box: Runestone Capital Part 1 & CNBC Squawk Box: Runestone Capital Part 2More news like this can be viewed on here.

The big question for 2018, just as it was in 2017, is whether volatility will mean-revert to its historical average. Runestone cares what volatility does, but we care on a day-to-day basis, not necessarily what occurs over a prolonged period of time. While it is clear that volatility is low from a historical perspective, it is not low when viewed through the lens of the spread between realized volatility and implied volatility. Should the trend from 2017 continue, and we see no major negative equity market events it may be extremely costly to be long volatility in 2018. On the other hand, the low starting point of VIX and VIX futures leaves ample room for volatility to increase dramatically should we see the return of sustained selling in the S&P 500. No one can say for certain how 2018 will play out: if the equity rally will continue, if higher volatility levels returns, a mix of both or something else. For investors that have a pre-determined view on the direction of volatility that explicit view should be expressed accordingly. However, for investors that don’t know exactly what volatility will do or when volatility will move, but want access to a top performing manager that can generate strong risk-adjusted returns in different market conditions we believe Runestone is a great option.

Visit to Register and Learn More about Runestone Capital and other funds on DarcMatter here: Browse Fund Profiles

View other DM Manager Series Interviews HERE