Volatility Arbitrage: Sharpe Benchmarks and Crash Risk

Summary

The document asks how to compare a volatility arbitrage strategy’s Sharpe ratio with those of established funds. It describes volatility arbitrage broadly as positioning for the difference between implied and realized volatility, often by receiving implied variance and paying realized variance. The response points readers toward volatility arbitrage indices and investable products as possible sources of benchmark performance data.

It cautions that the strategy can show strong risk-adjusted performance over extended periods yet suffer severe losses when volatility spikes, especially if risk is poorly managed. As a result, Sharpe ratios depend heavily on the measurement period and can conceal crash exposure. The document provides no actual fund-level dataset, numerical Sharpe benchmarks, or adjustment method, and its chart is referenced but absent from the supplied text. Comparisons therefore require consistent periods and an understanding of tail risks, rather than relying on a single average ratio.

Key ideas

• Volatility arbitrage often seeks to capture the spread between implied and realized volatility.
• The strategy may earn steadily for long periods while remaining exposed to sharp crash losses.
• Sharpe ratios vary with the sample period and can understate tail risk.
• Indices and investable products are suggested as sources of benchmark data.
• The document gives no numerical fund comparison or detailed dataset.

Tags

# What is the average Sharpe ratio of volatility arbitrage funds?


# What is the average Sharpe ratio of volatility arbitrage funds?












Where can I get data on performance metrics for volatility arbitrage funds? I am trying to compare the Sharpe ratio of my strategy to those of the major players.

## Answer by vonjd (score 8)

https://quant.stackexchange.com/a/2123

This depends a little bit on your definition of volatility arbitrage but in general what is meant is a strategy that takes advantage of the difference between implied volatility and realized volatility. Normally you receive implied variance and pay realized variance.

This strategy is the classical example of picking up nickles in front of a steamroller because it generates quite high Sharp ratios over extended periods of time until it crashes and when not managed right even blows up.

So just to give you some benchmarks you should search for "Volatility Arbitrage Index" (e.g. here and here - with Sharpe ratios included) and there are even some investable products out there (e.g. here - Sharp ratios included too).

So it very much depends on the time range what Sharp ratio you will get - the following chart makes it clear what I mean (Source: http://www.cboe.com/micro/vty/):

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.