Richard Selvala is the CEO of $3.5 billion Harvest Volatility Management. Harvest Volatility Management
Growing up near the Motor City of Detroit, Michigan, it was natural that Richard Selvala studied mechanical engineering in college with the ambition of becoming an auto executive.
Indeed, after graduating from Harvard Business School, he got the chance to work at auto giant General Motors, but one of his rotations with GM’s NY treasurer’s office shifted his career trajectory.
“There, we did a lot of hedging of our interest rate risk, of our currency risk, and even some of our equity risk,” Selvala recalled. “So that’s really where I saw the practical uses of options and how they can help end-users like a corporation.”
Ultimately, Selvala left GM for Wall Street where he first spent eight years with UBS, advising the bank’s corporate, institutional, and high-net-worth clients regarding foreign exchange and equity derivative hedging strategies.
Then he jumped to Credit Suisse where he eventually became the co-head of its volatility management unit called Volaris.
While life at the Swiss bank was not bad, it came with the typical corporate bureaucracies.
“It was a tiny component of Credit Suisse’s overall business,” he said of Volaris. “There are just lots of different hands in the cookie jar and lots of different meetings. I just wanted to focus on doing one thing really well for our clients and not being distracted by all the other things that come with being part of a big firm.”
In April 2008, Selvala took his strategy and a Rolodex of contacts and joined co-founder Curtis Brockelman to launch Harvest Volatility Management, which oversaw $3.5 billion in assets as of July this year.
For a firm that aims to reduce risks and only add measured risks in client portfolios, Harvest Volatility Management could not have asked for a better test of its strategies than the 2008 global financial crisis.
The firm’s core strategy is an iron condor strategy, which is an options strategy created with four options, four strike prices, and all with the same expiration date.
It is typically constructed by the sale of a short-dated, out-of-the-money call spread and the sale of a short-dated, out-of-the-money put spread both on the S&P or some other broad-based market indices.
“The idea there is you collect premium with a finite amount of risk on both sides,” Selvala said. “So ultimately with the iron condor strategy, we can make money whether the market goes up or down. We’re directionally agnostic.”
Although the iron condor strategy usually glides along smoothly when the market is in a calm state, it tends to give back when the market surges or collapses too fast.
“If the market really surges, the iron condor might give back a little bit, but the good news is your equities are really surging,” he said. “And if the market really collapses, we’re going to give back a little but it’ll be hedged and in that case, generally your bonds are doing really well.”
Selvala did not expect his firm to step right into the eye of the storm just five months after its launch, but his strategy proved resilient and thrived post-crisis.
“It was a challenge in September and October of 2008, but the fact that the strategy — after losing a lot less than people would have expected in September and October — made it all back and then some in November and December,” he said.
He continued: “Our four best months ever were November of 2008 through February of 2009 when the market kept imploding… It was really a testament to we make money when it’s more normal times, but we really contain it and ultimately thrive during a chaos like that.”
Today, as the chief executive of Harvest, Selvala still co-manages the firm’s iron condor strategy called “Collateral Yield Enhancement strategy” and its S&P replacement strategy called “Dynamic Delta Overlay strategy.”
He shares two options strategies primed for the current market environment, which has seen global stocks surge on a combination of positive vaccine efficacy news from Pfizer and BioNTech, significantly reduced political uncertainty, and lower volatility.
But the uncertainty regarding vaccine safety data, distribution, and administration logistics, along with a resurgence of COVID cases in the US, could still derail a rising market and the economic recovery.
One way to hedge the risks of the rising market is by using what Selvala calls the “stock replacement strategy.”
“Instead of being long equities and then protecting all that long by buying the downside insurance, which tends to be overpriced,” he said. “Let’s say you own SPDRs, what you can do then is you can sell your SPDRs and then buy upside calls. And what that does is if SPDRs are long 100 Delta, you buy upside calls that are 50 Delta or less.”
Delta is often referred to as a hedge ratio between the change in the price of an underlying asset and the change in the price of an option.
“It just means you’re taking profits near the highs, you still own upside but your downside is going to be much more protected, your downside will be limited to the premium that you spend,” he added, noting that those upside calls are a lot cheaper than those downside puts.
“It’s a way to not try to time the market too much by selling and having no upside exposure. It’s just a way of saying I want to keep my upside exposure but I really want to protect my downside given how much the market has run.”
To be sure, the strategy of replacing stocks with upside calls carries the risk of triggering a big capital gains tax for investors who have a lot of equities exposure.
For those investors, Sevala suggests that they can keep their stocks and buying put options as protection.
“Now is a better time to buy puts as protection if you didn’t have them before,” he said. “Because the market is so much higher so you’re protecting higher gains. And because volatility has come in and the price to buy that insurance has dropped dramatically.”
While options often entice investors with its promise to generate outsized returns, Selvala recommends options novices to start slowly, read, and try to get as educated as possible before jumping in and start trading.
“Don’t mistake luck for skill. If you buy a call just before the market takes off to the upside and all of a sudden, you might think you’re infallible or think that this is easy money,” he said.
“Because it can go the other way just as quickly. And that’s where understanding how to manage the risk, understanding how to use spreads, to contain that risk comes in.”
By: Josh Silva
Partner, Portfolio Manager
Disclaimer and Other Important Information:
Not an offer and confidential: This site and the information in it is provided for your internal use only. The information contained herein is proprietary and confidential to Harvest Volatility Management LLC (the “Adviser”) and may not be disclosed to third parties or duplicated or used for any purpose other than the purpose for which it has been provided. The information presented herein may contain expressions of opinion, which are subjective, may be difficult to prove, and are subject to change without notice. Additionally, although the information provided herein has been obtained from sources which the Adviser believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. The information is subject to change without notice. This communication is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or of any fund or account (a “Fund”) the Adviser manages or offers. Since we furnish all information as part of a general information service and without regard to your particular circumstances, the Adviser shall not be liable for any damages arising out of any inaccuracy in the information.
This site and the information contained in it should not be the basis of an investment decision. An Investment decision should be based on your customary and thorough due diligence procedures, which should include, but not be limited to, a thorough review of all relevant term sheets and other offering documents as well as consolation with legal, tax and regulatory experts. Any person subscribing for an investment must be able to bear the risks involved and must meet the particular Fund’s suitability requirements. Some or all alternative investment programs may not be suitable for certain investors. No assurance can be given that any Fund will meet its investment objectives or avoid losses. A discussion of some, but not all, of the risks associated with investing in the Fund can be found in the Fund’s investment advisory agreement, private placement memoranda, subscription agreement, limited partnership agreement, articles of association or other offering documents as applicable (collectively the “Offering Documents”), among those risks, which we wish to call to your attention, are the following:
Future looking statements, Performance Data and strategy level performance reporting: The information in this site is NOT intended to contain or express exposure recommendations, guidelines or limits applicable to a Fund. The information in this report does not disclose or contemplate the hedging or exit strategies of the Fund. While investors should understand and consider risks associated with position concentrations when making an investment decision, this report is not intended to aid an investor in evaluating such risk. The terms set forth in the Offering Documents are controlling in all respects should they conflict with any other term set forth in other marketing materials, and therefore, the Offering Documents must be reviewed carefully before making an investment and periodically while an investment is maintained. Statements made herein include forward-looking statements. These statements, including those relating to future financial expectations, involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Unless otherwise indicated, Performance Data is presented unaudited, “net” of management fees and other expenses, and net of performance allocations. Returns presented may reflect the reinvestment of dividends and other earnings. Due to the format of data available for the time periods indicated, both gross and net returns are difficult to calculate precisely. Accordingly, the calculations have been made based on in some cases limited available data and a number of assumptions. Because of these limitations, the performance information should not be relied upon as a precise reporting of gross or net performance, but rather merely a general indication of past performance.
The performance information presented herein may have been generated during a period of extraordinary market volatility or relative stability in a particular sector. Accordingly, the performance is not necessarily indicative of results that the Fund may achieve in the future. In addition, the foregoing results may be based or shown on an annual basis, but results for individual months or quarters within each year may have been more favorable or less favorable than the results for the entire period, as the case may be. If index information is included, it is merely to show the general trend in the markets in the periods indicated and is not intended to imply that the portfolio was similar to the indices in either composition or element of risk. This report may indicate that it contains hypothetical or actual performance of specific strategies employed by the Adviser, such strategies may comprise only a portion of any specific Fund’s portfolio, and, therefore, the reported strategy level performance may not correspond to the performance of any Fund for the reported time period. Please note that the Adviser calculates its assets under management with respect to its overlay strategies based on notional valuations and mandate sizes rather than market valuations.
Investment Risks: Investing in a Fund is speculative and involves varying degrees of risk, including substantial degrees of risk in some cases. A Fund may be leveraged and may engage in other speculative investment practices that may increase the risk of investment loss. Past results are not necessarily indicative of future performance, and a Fund’s performance may be volatile. The use of a single advisor could mean lack of diversification and, consequently, higher risk. A Fund may have varying liquidity provisions and limitations. There is no secondary market for investors’ interests in a Fund and none is expected to develop.
Not Legal, Accounting or Regulatory Advice: This material is not intended to represent the rendering of accounting, tax, legal or regulatory advice. A change in the facts or circumstances of any transaction could materially affect the accounting, tax, legal or regulatory treatment for that transaction. The ultimate responsibility for the decision on the appropriate application of accounting, tax, legal and regulatory treatment rests with the investor and his or her accountants, tax and regulatory counsel. Potential investors should consult, and must rely on their own professional tax, legal and investment advisors as to matters concerning a Fund and their investments in a Fund. Prospective investors should inform themselves as to: (1) the legal requirements within their own jurisdictions for the purchase, holding or disposal of investments; (2) and applicable foreign exchange restrictions; and (3) any income and other taxes which may apply to their purchase, holding and disposal of investments or payments in respect of the investments of the Fund.
This is not a solicitation to buy or an offer to sell interest in our funds, such offers will be made only by distribution of a private placement memorandum and only in compliance with applicable law.
1Please note that the Adviser calculates its assets under management with respect to its overlay strategies based on notional valuations and mandate sizes rather than market valuations. AUM is as of 9/30/2022.