A new alternative fund seeks to capitalize on the frequent volatility spikes occurring now

Published Sun, Feb 14 20218:24 AM EST

Market volatility shot up last month during the GameStop mania, and that's exactly when Hercules Investments' new mutual fund would shine. The Hercules Fund (NFLHX) , which made its debut at the start of February, invests in alternative assets including options in major equity indexes as well as hedges against volatility, offering outsized gains when the overall market experiences turbulence. "We've uniquely positioned the hedge fund product in a mutual fund wrapper," said James McDonald, CEO and chief investment officer at Hercules. "Our fund profits from the spikes in volatility. When those shocks happen, the gains in our fund should overcome and overtake any potential losses in the rest of the portfolio. It's completely uncorrelated to the markets." The fund uses call and put options tied to the S & P 500, Russell 2000 and the Nasdaq 100. It also invests heavily in the Nasdaq-100 Volatility Index futures (VOLQ), which gives a hedge exposure to the implied volatility of the Nasdaq 100 Index. The Cboe Volatility Index , known as the VIX, surged to over 37 from 23 on Jan. 27 at the height of the GameStop mania. McDonald said his fund would have soared more than 30%. Last month, a retail trading frenzy that created massive short squeezes in GameStop and others sent shockwaves through the market. A new wave of amateur day traders coordinated trades on social media including Reddit's WallStreetBets chatroom and piled into heavily shorted shares to force short sellers to cover. While the GameStop squeeze has mostly unwound, many on Wall Street worried that this behavior will repeat itself and cause more turbulence in the broader market. Signs emerged that the band of retail investors have moved onto other targets, including silver and cannabis stocks. The fear gauge VIX has stubbornly stayed above 20 for months even after the S & P 500 fully made back the pandemic losses and kept notching record highs. Some strategists from top Wall Street firms believe the high-flying market could be poised for a pullback or a correction in the near term. "We own index options to generate market risk-hedged performance and we offer a fourth of it in VOLQ, which emulates the same performance as the VIX does, but concentrates on Nasdaq 100 volatility protection," McDonald said. "We are the biggest trader of VOLQ on the Street." The Hercules Fund, which has a 3.36% expense ratio, is up about 5% since its inception. The fund is available for high net worth investors and institutional buyers. "Our strategy is useful to an investor who wants growth and is concerned about downside risk," McDonald said. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Traders on the floor of the New York Stock Exchange

Source: The New York Stock Exchange

Market volatility shot up last month during the GameStop mania, and that's exactly when Hercules Investments' new mutual fund would shine.

The Hercules Fund (NFLHX), which made its debut at the start of February, invests in alternative assets including options in major equity indexes as well as hedges against volatility, offering outsized gains when the overall market experiences turbulence.