German volatility manager moves Ucits fund wholly to cash

German volatility fund management house Conservative Concept Portfolio Management took profits on portfolio positions in its Ucits fund last night, and moved the entire product into cash.

The Bad Homburg-based firm said in a note to clients that it had moved Athena UI Ucits fund to cash after moving spreads in the portfolio to suit extreme and historically unusual market behaviour recently.

A move of 2% either way in the S&P 500 – which is wholly possible in current conditions – would have “negated the currently positive results”, it said.

The fund made a 0.8% gain in November and has lost money in only two months this year – January (-0.57%) and August (-0.11%).

Analysis of monthly return figures produces a cumulative gain for Athena of 3.2% this year to December. It has negative correlation to the S&P 500 over one, two, three and five years.

Overall volatility hedge funds are up 0.86% this year, according to Newedge’s index of the sector, but they fell on average 0.44% last month.

CCPM said of its Athena fund: “Within this market environment there is no need to be permanently positioned with Athena, as we can open good risk/reward positiions at very short term. At November month end, Athena holds S&P 500 December spreads.

“We will extend the portfolio with further spreads, in accordance with the volatility and skewness movements.”

However, last month brought some very unusual patterns in both stock prices and volatility indices.

CCPM pointed to Thanksgiving week, starting 21 November, when the S&P 500 fell about 5%, while the implied volatility increased just 5%. This was the worst performance for the stock benchmark during a Thanksgiving week since 1932.

At the same time it was also the lowest rise in volatility during a period when the market corrects 5% since volatility recording began back in 1990.

Similar extremes came in November when both the S&P 500 and EuroStoxx 50 registered their largest ever daily gains for the month of November. The VIX index – of expected near-term S&P stock volatility – closed near its monthly low, and skewness was at an annual low.

CCPM added: “There were days when the market dropped just 2%, while volatility and skew exploded 30% and more. We did adjust to that.

Sharp stock moves also happened quickly last month. CCPM noted the S&P showed an opening gap of over 1% on more than 40% of November trading days, and on two of November’s three last trading days opened over 2.5% away from the previous night’s close.

Through most of the month the EuroStoxx 50 showed opening gaps of 1.5% or more.

“Besides in March, with the earthquake in Fukushima, the environment became particularly more difficult after July/August – not necessarily because of the markets, but due to the volatility movements,” said CCPM, which can stake bets both ways on volatility.

It currently foresees two possible scenarios for markets and volatility.

One is a Christmas rally in markets, and volatility and skewness fall to “multi-month lows”.

The second is that the market experiences a sell-off on one day, and volatility and skew rise disproportionally, as happened in August.

“We are prepared for both scenarios with suitable spreads ready to be placed on the market,” CCPM said.

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