Jerry Haworth’s 36 South Capital Advisors accepted years of negative carry — annual portfolio losses from option time decay — to position for systemic rupture. When COVID-19 triggered market chaos in early 2020, that patience paid off. According to Societe Generale data reported by Reuters, 36 South’s volatility strategy gained 35% through January and February 2020, before the S&P 500’s full 34% collapse in March.
This performance validates a counter-institutional thesis: genuine tail protection requires paying premiums during market expansions to access asymmetric convexity during regime shifts. Here’s the mechanical breakdown of how 36 South structures this trade.
By Navnoor Bawa | LinkedIn | YouTube: @TheMathematicalTrader
The Strategy: Long-Dated Convexity
Unlike volatility arbitrage funds trading short-term gamma scalping, 36 South targets long-dated options — maturities of two years or more.
The Structural Advantage
Short-term implied volatility mean-reverts rapidly post-spike, creating whipsaw risk for tactical traders. Long-dated options capture the entire volatility term structure repricing during systemic stress. In calm markets, long-dated implied volatility trades at historically depressed levels — priced for perpetual stability. During crisis, two forces compound: spot moves (delta) and implied volatility expansion (vega), generating non-linear asymmetric payoffs.
The challenge: identifying entry points when long-dated volatility is structurally cheap relative to realized volatility potential. This requires systematic infrastructure, not discretionary market timing.
The Tools: GIVIX and Quadrivium
36 South’s proprietary systems solve the entry timing problem through quantitative screening:
GIVIX (Global Implied Volatility Index): Multi-asset implied volatility tracker monitoring equities, FX, commodities, and interest rates. Signals when volatility pricing reaches historically cheap levels across the term structure — the optimal entry zone for long-dated positions.
Quadrivium: Bottom-up scanning engine analyzing thousands of individual securities for mispriced options. Incorporates four analytical dimensions: implied volatility levels, technical price patterns, market sentiment indicators, and fundamental catalysts. Filters the universe to positions where markets price structural calm despite latent volatility catalysts.
These systems aggregate to answer one question: where is long-dated convexity trading at maximum discount to potential realized volatility?
Q1 2020: Execution and Monetization
The critical test for long volatility strategies isn’t buying convexity — it’s monetizing it during actual market chaos when liquidity evaporates and volatility term structures invert.
The Performance Timeline
According to Societe Generale data reported by Reuters, 36 South’s volatility strategy rose 35% over January and February 2020. This captured the initial volatility spike before the S&P 500’s peak-to-trough 34% collapse from February 19 to March 23, 2020.
Notably, 36 South representatives declined to comment when contacted by Reuters — standard practice for funds that monetize positions during crisis rather than marketing performance.
The Monetization Discipline
The 35% gain through February represents more than portfolio mark-to-market appreciation. Successful tail hedging requires active position management: selling into volatility spikes as convexity reaches peak valuation, not passively riding paper gains back down as markets normalize and implied volatility collapses.
This monetization discipline separates institutional-grade tail protection from retail put-buying that generates paper profits but realizes losses.
Post-Crisis Evolution: Addressing the Carry Problem
The behavioral challenge persists: institutional allocators cannot stomach multi-year negative carry, even when intellectually committed to tail protection. Annual portfolio drag from option decay triggers redemptions before the strategy validates.
The Carry-Neutral Solution
36 South registered the Kohinoor Carry Neutral Protection Fund with Ireland’s Central Bank in March 2020, designed to deliver:
40% returns if the S&P 500 falls 30% (assuming multi-asset volatility correlation)
Net zero carry over rolling 5-year periods during calm market environments
The structure likely employs a barbell approach: long-dated tail convexity funded by short-term volatility sales (selling near-term options premium) or yield-generating trades. This addresses the primary behavioral obstacle — annual negative carry — while maintaining asymmetric crisis payoffs.
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The Strategic Lesson for Institutional Allocators
36 South’s early 2020 performance demonstrates a structural market truth that contradicts conventional portfolio theory.
Diversification vs. Convexity
Traditional diversification smooths returns through moderate drawdowns but fails during regime shifts when correlations converge to one. Convexity — specifically, long-dated out-of-the-money options — provides asymmetric protection exactly when diversification fails.
The 60/40 Problem
The classic 60% equity / 40% bond portfolio relies on negative stock-bond correlation for risk mitigation. With bond yields structurally compressed near zero, bonds offer limited upside buffer against equity drawdowns. The diversification that worked for 40 years faces structural headwinds for the next 40.
The Negative Carry Question
Can institutional allocators maintain 2–5% annual negative carry from long volatility positions, knowing that the inevitable systemic crisis makes that cumulative cost trivial compared to the protection value during 30–50% equity drawdowns?
That’s the discipline question 36 South’s 2020 performance poses. The 35% gain in two months — before the full March collapse — validates the structural case for accepting negative carry as the price of asymmetric crisis optionality.
For allocators managing multi-decade investment horizons, the question isn’t whether to pay for tail protection. It’s whether you have the institutional fortitude to maintain it through the years of carry bleed before the crisis that makes it invaluable.
About the Author
Navnoor Bawa is a quantitative researcher specializing in systematic trading strategies and institutional hedge fund analysis. He publishes technical breakdowns of elite trading strategies and quantitative finance research.
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