Parallax Fund: Q&A
Parallax Fund LP specializes in relative value volatility arbitrage strategies. The firm, which has over $70 million under manage\ment and five full-time traders, was started in its current form in 1996 by former floor market makers who buy and sell listed equity options based on their volatility.
Q: How did you manage your risk before Imagine?  

A: We relied primarily on the daily sheets from our clearing company to give us our risk management information. We looked at the sheets every morning and identified positions that looked out of balance.

   

As technology in general advanced in recent years, Parallax's challenge was that the risk information we received from our clearing firm did not evolve to meet our needs in real-time, but remained static and once-a-day. Intraday market moves are important, and together with new positions you may take on your risk profile can change significantly intraday. The clearing company analysis also wasn't customizable. They used many appropriate standardized shocks, such as the effect on our portfolio of a 20 percent move in the index, or one standard deviation. But there was no implied volatility skew in their system. It was not customizable for ad hoc specific or general analysis.

For a while, we tried to develop our own risk system, which is labor intensive and can be costly. At the time of downsizing and consolidation of our two offices into one in San Francisco, we started looking instead for an outsourced solution. There were a lot of products that seemed well suited for a big bank with many traders and an array of complex products, and at the other end of the spectrum for individual market makers. At any given time, we have positions in some 300 different stocks, with somewhere between 2000 to 3000 holdings, all of which are traded by five people.

Q: How has the Imagine system worked out for you?  

A: It currently is meeting most of our needs. It allows us to get a better handle on our portfolio risk in a centralized way across all our traders. If something happens to the volatility term structure of the index, we know what our position is in real time, and in conjunction with our pricing tools and intuition we know how to take advantage of that change.

   

When our positions become unbalanced in any way, we can catch it in a timely fashion. If something does happen to one of our stocks, not only the trader in question but also those watching our whole portfolio see it quickly.

The outsourced Imagine system complements the size of our company and allows us to focus on trading, without having to deal with a lot of the technical issues associated with most real-time risk systems.
Q: What features have you found most valuable?  

A: The systems' ability to customize the way we look at risk has been the most beneficial. For example, we like to see the way our Vega breaks out by expiration and by strike for the whole portfolio, and we like to separate our premium into buckets expiring by month and by strike.

    We like the ability to impose correlated shocks, such as to see what happens if you move an index by some amount and other things move according to the beta or some other criterion. It also does a good job of allowing us to view the portfolio risk in terms of any hedge contract you choose, and to easily drill down to identify the primary contributors to a particular risk measure.
Q: Has the system allowed you to try any new trading strategies?  

A: Definitely. The system has allowed us to manage dispersion positions we hadn't attempted before. In dispersion trading, one typically sells index options and buys options on the underlying stocks. Imagine allows us to manage such a strategy because of its ability to accurately represent our portfolio risk and normalize that risk so we can meaningfully compare it between stocks.