Opportunities & Risks

The planned investment strategy can be described as market-neutral volatility trading in index, fixed income,
currency and commodity futures/forwards and options.

The strategy exploits a statistical (but persistent) pricing discrepancy* of certain options based on detailed risk analysis. This discrepancy phenomenon is stochastically stable, admits a conceptual explanation, and can be exploited in practice using advanced mathematics and high power computers.

Whilst trading options we stay insulated from movements in the underlying instrument by employing a non-standard option model allowing for more precise hedging than Black-Scholes or its derivatives.

Market-neutrality is maintained at all times by an automated program. However, sudden large movements in the markets or constraints in obtaining  liquidity, such as unscheduled exchange closings or connectivity breakdowns may defeat the attempts to maintain the market-neutral stance, in extreme cases exposing the fund to market risk which is only bounded by its leverage.

The strategy employs leverage, that is controlling instruments with notional value exceeding several times the firm's capital. Leverage is inherently risky but it can be controlled. We expect the maximum value to be no more than 5 at any time in any related group of markets or strategies, though it is possible that total leverage could be somewhat larger if the fund employs strategies that are not expected to act in unison under extreme market conditions.

* There is no reason to believe that the pricing discrepancy somehow represents market inefficiency; rather, Iris Investments will in effect deal in market risk, assuming the risk most participants don't want and are willing to pay  to get rid of. Iris Investments will then deal with those risks by a combination of dynamic hedging and buying other option contracts which can be acquired at fair value.