Waning volatility in 2019 has taken its toll on a number of market participants that seek to generate returns from trading options. In the latest proof of these challenges, investment firm Victory Capital has cancelled its plans to acquire Harvest Volatility Management, a fund manager specializing in options-based investment strategies for high net-worth individuals.
Victory Capital, which was spun out of regional bank KeyCorp in 2013 and has more than $58 billion in assets under management, reached an agreement in September to acquire Harvest for roughly $300 million. At the time, the two companies said the deal would add Harvest's expertise in derivatives to Victory Capital's platform and allow the combined firm to offer a more diverse range of investment strategies to their clients.
On April 22, however, Victory Capital announced that the acquisition had been terminated "in light of recent adverse market conditions" that affected Harvest's investment strategies. The two companies did not provide details, but analysts who follow Victory Capital's stock noted that the deal was contingent on certain performance targets that Harvest was unable to meet. Ken Worthington, an analyst at J.P. Morgan, wrote in a note to clients that Harvest's assets under management had decreased by an estimated 17% in the last 12 months and added that the purchase agreement had a termination clause if Harvest's revenue declined by more than 20%.
Harvest specializes in using equity index options for yield enhancement overlay, risk reduction, alternative beta and absolute return investment strategies. It implements those strategies by using options, typically through the sale of call and put spreads to generate premium income. Under normal conditions that generates a positive return that is not correlated with market direction, but in 2019 market conditions worked against that strategy. In 2018, Harvest's "collateral yield enhancement strategy" had a return of negative 5.95%, according to a Bloomberg report.
Harvest was not the only fund manager that ran into challenges with this strategy. The Cboe S&P 500 BuyWrite Index, a widely used benchmark for options-based strategies, had a negative 4.77% return in 2018, the first time in more than a decade that the benchmark was down for the year. AQR, a large hedge fund known for its expertise in quantitative investing, reported that its volatility risk premium fund had a negative 4% return in just the fourth quarter of 2018.
Neither Victory Capital nor Harvest will be responsible for any termination fee to the other party and will be responsible for their own costs thus far, according to terms of the deal.
Broadly speaking, trading in U.S. equity index options have suffered a steep decline in 2019 compared with 2018. The number of contracts traded in the first quarter was down 36.9% compared with the prior year, according to FIA data. The most popular instrument, CBOE's S&P 500 index options contract representing roughly half of the marketplace, saw volume decline 23.4% year-over-year in Q1.
|Contract||Q1 2019 Vol||Q1 2018 Vol||Vol Change|
|S&P 500 Index (SPX) Options, CBOE||76,390,203||99,761,601||-23.4%|
|CBOE Volatility Index (VIX) Options||31,388,482||65,150,118||-51.8%|
|E-mini S&P 500 Options, CME||13,477,404||22,688,753||-40.6%|
|All U.S Equity Index Options||151,069,780||239,465,607||-36.9%|