Hendry plays VIX index ahead of 'volatility collapse'

Eclectica's hedge fund star Hugh Hendry has been using put options on the so-called 'fear index' to play market volatility.

The manager of the Eclectica fund said a play on the VIX index, which measures volatility and tends to move inversely compared to the S&P 500, had contributed to his hedge fund's performance in October.

"In a month driven by economic and political developments in Europe, risk assets saw a significant rally. A series of meetings between European leaders raised hopes of a solution to the crisis engulfing Greece; equity markets rallied over 10% and fixed income sold off, with German 10-year yields retracing back to 2.2%," Hendry said.

"For the fund, net equity returned 20bp and, in recognition of the potential collapse in volatility should equity markets continue to rally, a further 6bp was made from one and two out of the money put options on the VIX index."

At the end of October the VIX index fell 15% to its lowest level in three months as eurozone leaders began outlining their plans to tackle the debt crisis.

Last month several high profile fund managers began adding risk back into their portfolios in anticipation of a Q4 rally as the VIX dropped back from a recent peak.

Signs of a more co-ordinated policy response in Europe had pushed equity markets 10% higher since early October's lows.

After closing at a historically elevated level of 45 on 3 October, the VIX then fell more than 35%, dropping into the 20s for the first time since the start of August.

It stood just above 28 on 14 October, raising hopes investors could face a more settled fourth quarter.

The index has largely been range-bound since that point, despite the consecutive days of market falls seen in mid-November, moving between a closing low of 24.5 on 28 October and a closing high of 36.2 on 9 November.