Amundi mulls expansion of volatility fund range

Amundi is understood to be planning a further version of its relatively conservative volatility arbitrage strategy later this year, seeking higher returns than the Eonia-plus-2% aim of its existing arbitrage product.

It is understood the next iteration could therefore suit European and other investors seeking higher returns.

It is expected to be distributed in Europe, and to pursue a similar strategy to Amundi’s existing volatility arbitrage fund.

Julia Kung, volatility product specialist at the French-headquartered firm, says the strategy is today positioned as a ‘premium capture’ strategy aiming to profit from strategies such as short-the-skew, capturing the premia between implied and realized volatility on defensive single stocks, and correlation/dispersion trading.

Amundi’s €2bn volatility arbitrage funds form part of a wider €7bn volatility program running since 1999. There are also global and European-focused versions of a directional long/short strategy.

The arbitrage portfolios seek differences in value in volatility across and within asset classes. “The process is quite diversified because we are looking for arbitrage opportunities in volatility in equity indices, single stocks, convertible bonds and interest rates,” explains Kung.

The arbitrage component might arbitrage between volatility of the S&P 500 and Eurostoxx 50 indices, for example, or between that of Bunds and Treasuries, between stocks in one or more sectors, or between different strike dates for volatility-related derivatives.

Amundi’s program – both the €2bn in arbitrage and €5bn in directional strategies – can take both long and short positions.

Ben Funk, head of research at fund of funds Liongate Capital Management, says it has been a tricky market over the past few years for those just buying implied volatility. “They have been hurt very badly over the past few years as realized volatility has been astonishingly low. Looking at monthly realized volatility on the S&P 500, for example, we saw at the end of last year levels that were even lower than any point in the past decade.”

Amundi’s Kung emphasises it is a benefit that Amundi’s program is not restricted just to going long volatility.

The program is also liquid, with daily terms, she says. As it only uses listed options, it is also cost-effective, as Amundi need not operate through investment banks, she says.

The Ucits funds’ generous terms and no gating meant, during the crisis, investors could quickly drain them of about half their assets in 2008. Investors redeemed despite some of Amundi’s volatility funds making 25% that year. Assets in the overall program have since exceeded previous peaks.

Investors note recent unusual behaviour in equity index volatility. As the S&P 500 index fell about 1% on 3 June, for example, the Vix index also dropped. Normally this gauge of investor nervousness rises as markets fall.

Funk said late in June that institutional investors selling of volatility, to enhance yield, depressed implied volatility’s price. This meant volatility dropped even as markets did, too. “It has been many years since this last happened and is clearly indicative of investors’ complacency. There seems to be little fear of waterfall declines in the near term.”

Kung notes 1-year implied volatility of a global basket is “very low at around 21%”, and precedent suggests typical mean reversion to about 25%.

She also noted 1-year implied volatility rose about 1 point in June as shares plunged by up to 6% by mid-June. Amundi’s global directional volatility fund made 1.3% in June, before America’s debt ceiling crisis replaced the eurozone’s own crisis this month.

Kung says it can be difficult for managers to place volatility-linked positions based on outcomes of political wrangling – in Washington as much as Brussels – when one is not playing on fundamental or market structural factors.

However, she adds being able to make short term trades can be helpful in such situations.

The recent end of quantitative easing could remove a buoyancy induced in shares, which Kung says has worked to dampen realized volatility.

“Washington has been running out of policy tools, and they cannot really do QE3. If there is no resolution to the debt ceiling or improvement in the economic scenario people will start worrying and equity volatility could potential start going up again,” Kung says.


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