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Equity-like returns even in flat markets
Date:
08. July 2024
Volatility is an asset, much like a stock. It can generate returns and create value – provided one knows how to manage it. Many market participants are aware of the frequency and magnitude of fluctuations and therefore the associated risks. Furthermore, regulatory requirements have increased in recent years, prompting more investors to seek ways to
hedge their investments. This creates opportunities that the Alturis Volatility fund capitalises on. In this interview, Andrej Brodnik, founding partner of Alturis Capital, explains how the volatility premiums collected by the fund serve as a form of insurance against falling stock markets and identifies the key factor for success.
Andrej Brodnik: Certainly. At its core, what defines the Alturis Volatility is comparable to the traditional insurance business. An insurer takes on a specific risk of loss and expects to be compensated with a premium in return.
By exclusively selling put options on the S&P 500, Alturis Volatility essentially acts as an insurer of stock market risk. It assumes a portion of the risk arising from fluctuations, or volatility, and demands a risk premium in return: the so-called volatility premium.
If the loss event, such as a drop in price, does not occur, the fund retains the full premium (+). Moreover, even if the S&P 500 declines, the fund does not automatically follow suit. The S&P 500 can fall moderately, and the fund can still collect the premium (+). Only when the decline in the S&P 500 is more significant does the likelihood of the fund incurring losses increase (-). In other words, the payout profile of put options allows for a positive return in rising, stagnant and slightly declining stock markets.
How would you define the investment objective of Alturis Volatility?
The motivation of the two fund advisors, Björn Esser and Christian Wogatzke, is quite simple. The goal of Alturis Volatility is to capture as many volatility premiums as possible for the benefit of investors. This strategy is particularly effective when the fund insures against high implied volatility (the volatility feared by investors) and collects high premiums, but only has to cover a lower, actual realised volatility. The key to investment success, therefore, is the difference between implied and realised volatility – and the fund's performance so far clearly supports this approach.
Overall, the fund aims for an average target return of the 3-month Euribor plus 6-7% per annum.
Definitely not. We exclusively insure the S&P 500 Index. In the event of a significant fall of the index, we would always lose less than the S&P 500 because we never use leverage. However, the faster the stock market corrects, the more we are affected by the drawdown.
The fastest drawdown of the S&P 500 in the last 10 years occurred during the Covid-19 crisis. During that time, from 19 February 2020 to 23 March 2020, the market lost 34% in a short period, whereas the Alturis Volatility strategy only lost 22%.
We believe our strategy functions like a defensive equity investment but with significantly lower fluctuations. The aim is to generate a higher sharpe ratio in client portfolios compared to similar asset classes.
Our strategy performed so well in 2023 that we received our first FUND AWARD 2024 during an award ceremony by the monthly magazine €uro, as well as BÖRSE ONLINE and €uro am Sonntag.
A summary of your investor rights can be found at www.universal-investment.com/en/Corporate/Compliance/Investor-Rights. In addition, we would like to point out that Universal Investment may, in the case of funds for which it has made arrangements as management company for the distribution of fund units in other EU member states, decide to cancel these arrangements in accordance with Article 93a of Directive 2009/65/EC and Article 32a of Directive 2011/61/EU, i.e. in particular by making a blanket offer to repurchase or redeem all corresponding units held by investors in the relevant member state.
