Hedgeye Investing Summit Spring 2026 | Nancy Davis, Founder & CIO of Quadratic Capital

Key Concepts

• Long Gamma Strategy: A strategy involving the purchase of options, allowing the investor to benefit from market volatility ("jump moves") by buying low and selling high.
• Interest Rate Volatility (Vol): The fluctuation in interest rates; the speaker focuses on SOFR (Secured Overnight Financing Rate) curve volatility rather than traditional equity VIX.
• Yield Curve Steepening: A market condition where the spread between long-term and short-term interest rates widens.
• AGG (Bloomberg U.S. Aggregate Bond Index): The standard benchmark for core fixed income, which the speaker argues is inherently "short volatility" due to embedded prepayment risks in mortgages and callable bonds.
• IVOL (Interest Rate Volatility ETF): An ETF designed to provide long exposure to interest rate volatility and yield curve steepening, acting as a hedge for traditional bond and equity portfolios.
• Quad 4: A specific macroeconomic environment (slowing growth, slowing inflation) where the speaker suggests volatility-based hedges perform optimally.
• ISDA Agreements: Specialized legal contracts required to trade over-the-counter (OTC) derivatives, representing a significant barrier to entry for retail investors.

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1. Main Topics and Key Points

• The "Short Vol" Problem in Fixed Income: Nancy Davis argues that most investors are unknowingly "short volatility" because their bond portfolios (benchmarked to the AGG) contain mortgages and callable bonds. Homeowners have the option to prepay, which effectively makes the bondholder short an option.
• The Role of IVOL: The ETF is designed to "complete" the AGG by providing long volatility exposure. It uses OTC interest rate options to profit from yield curve steepening and volatility spikes.
• Market Asymmetry: Davis highlights that current interest rate volatility is historically low (trading around 3.1 basis points, compared to 16 during the 2023 Silicon Valley Bank crisis). She argues this creates a "Cookie Monster" opportunity to buy cheap options before inevitable market spikes.
• Tax Efficiency: Unlike holding physical TIPS (Treasury Inflation-Protected Securities), which can create "phantom income" tax liabilities, the IVOL ETF uses a Bloomberg TIPS index and in-kind treasury trading to avoid capital gains and phantom tax issues.

2. Real-World Applications

• Portfolio Insurance: The speakers compare IVOL to home or car insurance. Just as one would not own a home without insurance, they argue investors should hold "portfolio insurance" to protect against unexpected market shocks (e.g., the 2020 pandemic, where IVOL performed well).
• Hedging: IVOL serves as a hedge for both equities (via front-end yield moves) and bonds (via long-end yield moves). It is presented as a "go-anywhere" asset that does not require a specific macro view to be effective.

3. Methodologies and Frameworks

• The "Cookie Monster" Approach: A metaphor for aggressively accumulating options when implied volatility is cheap, anticipating that volatility will eventually revert to the mean or spike due to unforeseen events (geopolitical, domestic, or economic).
• Delta-Neutral vs. Directional: Unlike strategies that rely on delta hedging (trading the spread between implied and realized volatility), IVOL is managed as a directionally long strategy, benefiting from the asymmetry of options pricing.

4. Key Arguments

• TIPS as an "Orphan" Asset: The speakers criticize traditional TIPS, arguing they are flawed because they are "long duration" assets that fail to protect against inflation in the way investors expect. They suggest TIPS were historically promoted by institutional figures (like Ray Dalio) as a way to hide from duration risk.
• Fed Policy Front-Running: The two-year yield is identified as the primary signal for Fed policy. The speakers argue that current market pricing is highly asymmetric because very few rate cuts are priced in, meaning any negative economic surprise (a "growth scare") would likely lead to a significant, profitable move for the strategy.

5. Notable Quotes

• "We’re one of the few firms out there that is long gamma... we’re always buying low, selling high." — Nancy Davis
• "I’m trying to help people understand that their bond portfolio naturally is short OTC options." — Nancy Davis
• "I look at numbers. I don’t look at narratives." — Keith McCullough

6. Synthesis and Conclusion

The discussion centers on the necessity of sophisticated hedging in a market characterized by suppressed volatility. Nancy Davis presents IVOL as a unique, institutional-grade solution that addresses the hidden "short volatility" risks embedded in standard bond indices. By leveraging the asymmetry of interest rate options and the yield curve, the strategy provides a non-correlated hedge that performs well during "Quad 4" environments or unexpected market shocks. The main takeaway is that investors should treat portfolio insurance with the same necessity as physical asset insurance, utilizing specialized tools to navigate interest rate cycles rather than relying on traditional, flawed fixed-income benchmarks.