Liquid alternative strategies are an important component of any portfolio. But what should investors consider when selecting them?

Most people in Germany have not benefited from this development.² Even professional investors have missed out on return opportunities due to risk aversion. Scepticism about equity valuation levels is understandable and is supported by the latest Goldman Sachs study. The study concludes that the US stock market is likely to grow by only around 3 percent p.a.³ over the next 10 years.

Even though it is just a forecast, it may still be worthwhile for every investor to review their portfolio structure. Liquid alternative strategies could become an even more important component.

Naturally, this segment encompasses a wide range of strategic approaches. Due to their attractive target returns and the reliability of the underlying return source (the volatility risk premium⁴), volatility strategies are particularly popular as a diversification option. At least four established approaches in the German market can be identified within this space, all of which utilise options strategies (trading equity index options):

1. Short Put + Long Put + Volatility Calls or: collection of put option premiums in combination with a vola hedging concept 
The strike prices of the sold put options are closer to the spot price than those of the purchased put options, generating a positive cash flow. To hedge against market crashes, calls on the relevant volatility index are continuously purchased.

2. Cash-Secured Short Put or: realisation of the volatility premium through the sole sale of short-dated put options
Slightly out-of-the-money put options are sold, but without leverage. This means sufficient liquidity is always maintained to meet any obligations arising from settlement.⁵ Additional hedging is not foreseen.

3. Long Put + Short Put x 2 or: delta-based, actively managed put option strategy with negative correlation to the equity market
The strike prices of the purchased put options are closer to the spot price than those of the sold put options. A larger quantity (often double) of put options is sold to reduce the financing cost of the position. Ideally, the sold put options expire worthless, while the purchased put options are settled in the money.

4. Short put + short call + hedge (dynamic) or: dynamic  yield corridor concept 
Out-of-the-money put and call options are sold simultaneously, creating a yield corridor. Fluctuations in price and volatility are managed dynamically by adding further hedges, such as options or futures. The yield corridor itself is also adjusted dynamically if it no longer aligns with the spot price. This approach is implemented in the FINLIUM Ambition fund for example.

For portfolio diversification, strategies with low equity market correlation are particularly suitable (see table for relative comparison). The target return for each approach is six to eight percent p.a., but the actual performance will heavily depend on which equity market phases dominate in the coming years (see table).

If the scenario outlined by Goldman Sachs materialises, the dynamic yield corridor approach adopted by FINLIUM is likely to perform very well.

The FINLIUM Ambition fund (Share class R ISIN: DE000A3DQ210 / Share class I ISIN: DE000A40DBS5) is managed using proprietary investment technology that operates without forecasts and independently of human emotions, allowing for highly dynamic adjustments. A look back at August 2024, when a severe volatility crash hit the equity markets, illustrates this: while other approaches, such as strategies 1 and 2, made minimal portfolio adjustments and quickly recovered temporary losses with the subsequent equity market rebound, FINLIUM took longer to recover due to its portfolio adjustments. However, the portfolio was well-positioned to remain stable in the event of a continued crash.

FINLIUM aims to deliver equity-like average returns with significantly reduced risk through its fund, offering a unique investment experience. For private investors, the fund provides an opportunity to diversify portfolios further thanks to its low correlation, while also making it easier for sceptical investors to enter the market (see Champions News  April 2023, FINLIUM article). At the same time, professional investors benefit from a diversification option designed for maximum value stability and a high Sharpe ratio.

The FINLIUM Ambition fund has delivered an annual return of 6.0 percent⁷ since its inception around two years ago, with a maximum drawdown of only -4 percent. This stability promise has been met, despite the equity market environment – particularly in 2024 – not being favourable for the strategy (see table). The FINLIUM team is looking forward to market phases where the approach can demonstrate its advantages more effectively.

^{1 As per 30 November 2024, excluding dividends.
2 According to the latest 2024 study by the German Equities Institute, only 17.6% of Germans are invested in the stock market.
3 Average 3% p.a., forecast range of -1% to +7% p.a.
4 Successful strategies systematically sell the equity market’s expected future volatility, which, according to empirical evidence, is consistently 4–5 percentage points higher than the volatility actually realised. This difference is referred to as the volatility risk premium.
5 Due to put-call parity, this approach is equivalent to a covered call strategy on an equity index.
6 As per 30 November 2024
7 As per 30 November 2024}