Volatile summer feeds the appetite for fear funds
Investors are beginning to see volatility as something that can be exploited, rather than feared, writes Lukas Sustala.
But from a portfolio view, some fund selectors prefer volatility ETPs. "The clear advantage of buying an ETF is that you definitely are long volatility, whereas some active funds clearly have a different concept," argues Thomas Wehinger, fund manager at Pioneer Investment Austria, where he oversees €900m of fund-of-funds assets.
In addition, the flexibility of buying and selling the ETP at all hours adds to the value of the product, Wehinger says.
Thus, investors have to decide through which product they want to gain access to volatility.
Given the recent decline in risk-free interest rates, fund groups add flavour to their active strategies with their absolute return mandates.
Lupus alpha, the German fund group with €6.5bn in assets at the end of July and a major focus on absolute return strategies, rolls out a tweaked version of its volatility strategy in the coming months.
"The demand of clients is clearly shifting towards strategies with higher returns", argues Alexander Raviol (pictured), head of portfolio management for absolute return strategies at Lupus alpha.
The new strategy will also capitalise on the term spread model, that is embodied in the current fund and that sells short-term options and buys longer-term ones.
Yet, "it will be open to new opportunities", including plays on the volatility of dividends or instruments such as dispersion swaps and mean reversion strategies.
The mid-term target return of the fund are 450 basis points in excess of a risk-free return. Raviol identifies a clear trend in the demand of clients for absolute return mandates: "The Exchange-Traded Notes on volatility indices do not act as a role model for us."
Amundi is working on a similar seasoning, adding risk and return expectations to its arbitrage and directional volatility strategies.
Before the end of the year the asset manager is set to launch a cash +4% version of its arbitrage strategy, twice the return target of the available funds.
"Volatility as an asset class is gaining traction", says Raviol. He adds that as buy-and-hold strategies for equities are challenged by the tough market environment and bond markets offer small yields, investors are rethinking their long-only stocks, long-only bond portfolios.
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