An Interview with Peter Rothschild of Vaucluse Partners

Stuart Barton, PhD, CFA I March 29, 2019

In January 2019, Invest In Vol partnered with Vaucluse Partners to offer Separately Managed Accounts on their quantitative volatility strategies. More details available here. While keeping a relatively low profile, Vaucluse has managed some of the world’s most effective volatility strategies, and its partnership with Invest In Vol will broaden access to strategies previously less accessible.

Vaucluse Partners was co-founded in 2011 by Dr. Peter Rothschild – a professional Physicist and expert in detecting weak signals in noisy data. Vaucluse’s strategies take advantage of Peter’s innovative advances in x-ray signal processing to improve the risk-return profile of popular listed volatility products. Peter holds a PhD in High Energy Nuclear Physics from MIT and over 40 industry patents.

Dr. Stuart Barton of Invest In Vol sat down with Peter to get a better sense of what drew him to volatility trading and how his strategies emerged from High Energy Nuclear Physics.

Peter, to start with, tell us a little bit about your background?

I grew up in Australia with a passion for science and particularly astrophysics. When I moved to the US to study physics at MIT, one of my first research projects was to help design a solar neutrino detector deep underground, below the Gran Sasso Mountain in Italy. As part of the design process, I became proficient in computer simulations, which eventually gave me the skills to develop my trading algorithms many years later. My career in the tech world, since graduating from MIT with my Ph.D., has largely revolved around my ability to code complex algorithms quickly, allowing me to rapidly test various different ideas and hypotheses.

How did you come to adapt your technical background to algorithmic trading?

As Chief Scientist at American Science & Engineering for many years, I was involved in developing algorithms that could automatically find consistently repeating patterns in noisy x-ray image data for security applications, such as finding weapons and explosives in airport baggage, vehicles, and shipping containers. With a growing interest in investing and trading, it was a fairly easy and natural extension of my work in the security space into the financial space.

Why volatility products?

My first algorithms were genetic data-mining algorithms, that could randomly create and backtest hundreds of millions of different strategies given a list of stocks. Once a promising strategy had been found for a given stock, the algorithm would refine the strategy through random changes or "mutations" until further improvements could not be found. In one of my early lists, I included the VIX-linked Exchange Traded Note (ETN) - XIV. I was intrigued as to why my genetic algorithm, when attempting to maximize returns over a 5 year backtesting period, so frequently chose to trade XIV. Once I realized that the VIX complex underlying XIV had the potential to produce outstanding returns with moderate drawdowns, I decided to focus on volatility trading as my area of expertise.

Tell us a little about Vaucluse and the strategies they offer?

Vaucluse is based exclusively on algorithmic trading of volatility Exchange Traded Products (ETPs) and offers two strategies:

i) AlphaVol - an event driven strategy that takes a short volatility position via SVXY when there is a high probability of harvesting the Volatility Risk Premium, or when mean-reversion of an elevated VIX is likely. AlphaVol is either 100% invested in short volatility or exclusively in cash.

ii) AlphaVol Long Bias - a dynamically rebalanced strategy that takes a long volatility position via VXXB, or a short volatility position via SVXY, and rapidly switches between either position, depending on market conditions. The strategy can also take a sizable cash position, when advantageous to do so.

How do you manage risk in these fairly volatile products?

The AlphaVol strategy utilizes automatic stop-losses that provide a level of protection against a ‘flash crash’ type scenario. Additionally, the AlphaVol strategy utilizes a fairly stringent set of entry conditions - all of which must be met in order to enter into a short volatility position - but five separate exit conditions - any one of which will trigger an exit. It is therefore considerably easier for the strategy to exit a short vol position than to enter it, aiming to reduce overall risk.

The AlphaVol Long Bias strategy is able to very rapidly transition from a long vol to a short vol position, or vice-versa. This allows it to correct for changing market conditions, even when they are changing very rapidly. Under normal conditions, the strategy uses the term structure of the VIX futures to dynamically rebalance its portfolio as often as daily. However, additional factors are monitored that can dynamically vary the allowed maximum allocations, and under more extreme conditions, these maximum allocations are reduced and the strategy will hold a larger cash position.

2018 saw some changes in the volatility market, how was Vaucluse able to navigate the year so well?

The Vaucluse strategies performed exceptionally well through the extreme volatility events seen in February of 2018. To begin, the decision was made quite early to replace our XIV exposure with SVXY due to the deteriorating fundamentals of the ETN.

The AlphaVol strategy closed its short volatility position on January 31st after detecting a deteriorating VIX futures term structure, and was therefore 100% in cash during the period when the SVXY lost over 90% of its value.

The AlphaVol Long Bias strategy, meanwhile, held a strong long volatility position in VXX through this period, and then reverted fully to cash shortly after. It ended the month of February with a significant net gain.

How do you think volatility products can be used in a portfolio?

I believe that volatility products can play an important part in a portfolio, but need to be traded as part of an algorithmic strategy. None of these present products are suitable as part of a buy-and-hold portfolio. Volatility strategies may be particularly suited to investors with a higher risk tolerance, or as a small - probably up to 10% - component of a more conservative portfolio.

Why did Vaucluse partner with Invest in Vol?

Vaucluse recognized that Invest in Vol (IIV) is a leader in the volatility space, and could offer us extremely valuable guidance and direction in this space. Beyond broadening our reach by hosting our SMAs on their platform, IIV additionally acts as the sub-advisor to our hedge funds and is helping us develop even more sophisticated strategies.

About Vaucluse Partners

Vaucluse Partners is a Registered Investment Adviser focused on the intersection of growth in passive investing, volatility as an asset class, and quantitative strategies. To learn more or contact Vaucluse Partners click here.

About Invest In Vol

Invest in Vol (IIV) is an SEC Registered Investment Adviser with a team of financial professionals dedicated to volatility investing. IIV advises and manages investments for hedge funds, advisors, family offices, and individuals through sub-advisory services and Separately Managed Accounts (SMAs).


This article is not intended as, and does not constitute, investment advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. The views and opinions expressed are those of the portfolio manager at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Investments are subject to change without notice.

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Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. Carefully consider the investment objectives, risk factors, charges and expenses before investing. Invest In Vol, LLC is the investment advisor for the separately managed accounts (SMAs) and advisory services; it provides investment advisory services to clients and does not sell securities. For a more complete description of our business, Form ADV 2A with accompanying brochures, and disclosures & definitions click here.

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