Insights into Vega’s algorithm – the GFC

Greedy when others are fearful.


Memo to: Vega Capital clients
From: Scott Shuttleworth
Subject: Insights into Vega’s algorithm – the GFC

Neither the information, nor any opinion, contained on this Website constitutes a solicitation or offer by Vega Capital Pty Ltd (“Vega Capital”) or its affiliates to buy or sell any securities, futures, options or other financial instruments. Decisions based on information contained on this Website are the sole responsibility of the visitor whom we would encourage to seek relevant advice from a licenced professional.

Last week I wrote a blog about Vega’s hedging algorithm – the response was great and I appreciated the positive feedback a lot.

Since investors are keen to learn more about how Vega can deliver downside protection, I thought it would be valuable to show a simulation of our strategy over the GFC during 2008. This is notably where Vega has the potential to really shine.

Let’s start by looking at the SPY. The index began 2008 at circa 145 and capitulated 38.6 per cent over the year to below 89. Annualised volatility was 41.3 per cent for this period. This was one of the worst markets for investors since the Great Depression.

And admittedly, if it weren’t for the actions of The Federal Reserve, The US Treasury and many members of the exiting Bush Administration and entering Obama Administration, it might well have been the Second Great Depression. I always credit Ben Bernanke, Timothy Geithner, Hank Paulson and President Barrack Obama in particular for their huge roles in stabilising the Global Financial System at this time.

So let’s see how Vega would have performed over this period using SPY put options with a duration of 6 to 12 months.

The returns are clearly what happened? In the simulation, Vega during 2007 had been long market exposure through writing put options across various market indices. By late in 2007, it had liquidated all its positions into cash. In late April of of 2008, it began buying puts and also entered into some hedges.

By year end, the simulation results show that Vega would have generated a 142 per cent return on capital employed. Versus the index, this represents circa 180 percentage points of out-performance. Annualised volatility was rather high at 55 per cent, however this is a small price to pay for such a high return. In addition, the strategy was rather inefficient between October and December and had some rough draw-downs, although not as bad as what the SPY would have experienced over the year.

Overall, if this were the result of our portfolio over this timeframe, we’d be quite pleased. But please note a few important points to consider upon reviewing these performance numbers.

  • The simulation is limited in nature. We’ve only run it on SPY puts of a certain duration at a single strike for the purposes of a blog. Other positions on other assets and strike prices may have generated lesser returns.
  • The simulation was done on a portfolio of long SPY put options. In future we’ll most likely have the algorithm use bear put spreads to achieve high returns but with lower downside risk to reduce the impact if our models were to be wrong.
  • Past performance does not equal a promise of future returns. The GFC was a very volatile event and in the simulation Vega was able to capture the downside well. Yet future crises may be less severe which would obviously mean the potential for returns is lesser.
  • Events like this don’t occur every year. We expect Vega to do well but certainly not earn more than 100 per cent annually.

Our mandate at Vega Capital is to invest our client’s investment in such a way as to generate high returns during both expansions and contractions in the economy and financial markets. This means that for sophisticated clients, our offering can help buffer the negative impact of a large financial crash to an investment portfolio as well as generating high returns in better times.


The Vega Fund has now formally launched and is open to sophisticated and wholesale investors. Qualified investors may find our Information Memorandum and Application Form here however if you would like a hard copy mailed to you, please don’t hesitate to contact our office on 1800 960 707.

Vega Capital is a Corporate Authorised Representative (No. 001264482) of Alpha Securities Pty Ltd (ACN 124 327 064) AFS Licence No. 330757.

No Comments Yet.

Leave a comment



It is important that you read this notice carefully before proceeding further. It contains legal and regulatory statements relevant to the information contained on this website. By accessing this website, you agree to be bound by the terms and conditions below. When you have read the following information, please click on "I agree" to continue to the website.

This section of the website is for wholesale, professional or sophisticated investors only, within the meaning of the Corporations Act 2001 (Cth). Consequently, the content of this section of the website is intended for use only by persons having professional experience in matters relating to investments and must not be accessed or relied upon by any other person including, without limitation, retail clients. By clicking “I have read and understood this disclaimer” at the end of this page, you confirm that you are a wholesale, professional or sophisticated investor and you are not a retail client.

None of the information published or made available via this website is intended to be published or made available in any jurisdiction where to do so would result in the breach of any applicable law or regulation in that jurisdiction. This section of the website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this section of the website available to you. You should satisfy yourself before accessing this section of the website that we would be allowed to advertise investments and investment services to you under the laws and regulations of your jurisdiction.  This section of the website is not for use by "US Persons". A "US Person" is defined by US laws and regulations in force from time to time. If you are resident in the US, or as a corporation or other entity are organised under US law or administered by or operated for the benefit of a legal or natural US person, you should take professional advice to determine whether you are a US Person and you should not access this section of the website until you are sure that you are not a "US Person".

Under no circumstances should any information contained in this website be regarded as an offer or solicitation to deal in investments in any jurisdiction including, but not limited to, the United States of America. Neither Vega Capital Pty Ltd (“Vega”) nor any investment products mentioned on this website are registered under United States securities laws and, subject to certain limited exceptions, may not be offered, sold, transferred or delivered in the United States or to US persons.

You should be aware that past performance is no guarantee of future performance.

Nothing in this website should be regarded as investment advice. If you are unsure as to whether the investments described in this site are suitable for you, we strongly recommend that you seek professional advice from a financial adviser. Persons should consult their professional advisers as to whether they require any governmental or other consents in order to invest in the products described on this website. References in this website to specific securities should not be taken as a recommendation to buy or sell those securities, but are included for the purposes of illustration and/or information only.

Although reasonable care has been taken to ensure that the information set out herein is accurate, no representation or warranty, express or implied, is made as to its accuracy or completeness. Information on this website may be changed without prior notice. Neither Vega nor any of its affiliates accepts any liability for any loss, either direct or indirect, incidental or consequential, arising out of any information on this site not being true and accurate.

This website may contain or link to content which is generated by third parties. Following links to any other websites shall be entirely at your own risk.

The information on this website is confidential and is protected under copyright law.  No information or material contained on this site may be reproduced, distributed , transmitted, displayed or commercially exploited without the written consent of Vega.

Vega Capital is a Corporate Authorised Representative (No. 001264482) of Alpha Securities Pty Ltd (ACN 124 327 064) AFS Licence No. 330757.

You must accept the disclaimer to continue.