I knuckled down and did the regressions for every sub-index tracked by Barclay (now known as Barclay Hedge). You can find the raw data published on their website here
Firstly, here is a chart of the cumulative returns for all of the indices.
This was prepared from the data that Barclay Hedge make available on their website.
The following table
shows the results of all of these regressions. The method is a simple linear regression onto the VIX-GARCH variance spread.
The table shows a range of responses, and some fairly high (as much as 37%) R-Squareds as well as some fairly low ones. The largest R-Squared is for Convertible Aribitrage, which is not surprising as this is most purely a delta-hedging strategy and so should correlate very strongly with the available risk premium expressed via the VIX-GARCH spread.
However, I'm quite suprised that Distressed Securities is the investment style with the second strongest regression. Perhaps this indicates that DS traders are implementing their strategies via options or perhaps it indicates that distressed securities could be thought of as binary call options on the profitability of a company.
The third strongest is Fixed Income Arbitrage which is, I'm hypothesising, not actually "Arbitrage" but dominated by convexity spread plays. In this scenario, it would also be a fairly pure delta hedging strategy -- If so this might indicate that the profitability of interest rate option trading and that of equity option trading are closely linked; which is the kind of hypothesis we originally advocated in our original post
Of course, the observable similarity of the returns in these series is crying out for the establishment of a proper factor model, which we will examine in the next post.