Volatility products are gaining popularity, yet fund selectors in Austria are struggling to decide which ones to use from the growing choice of absolute return and hedging strategies.
"Many new products have an absolute return characteristic and thus they do not work as well as a hedge," says Stefan Klocker, head of asset management at Semper Constantia, an Austrian private bank with its own fund range.
So, investment managers need to choose between various volatility flavours. There are defensive strategies that reduce short-term losses to a minimum, such as the flagship of the industry, the French-based Amundi Volatility strategies. But these might not hedge equity risk in time of turmoil.
"The perfect strategy does not exist," says Klocker, who recently screened the market for volatility products that might fit his own investment agenda.
Spoilt for choice
There is a wide range of products on offer, from aggressive hedges and absolute return products, through -options and exchange-traded notes (ETNs) on VIX, to complex long-short strategies that try to deliver absolute returns. Big players in this field, such as Amundi or JPMorgan, cover strategies with relatively high exposure to the VIX or VStoxx to strategies with absolute return characteristics.
If the purpose is hedging of risky positions, products need to be long volatility. "For short-term hedging, ETNs work quite well," says Klocker, fully aware of huge costs due to rolling losses. "The point is: insurance never is for free."
Buying a hedge against rare tail risks which hit financial markets hard means paying a hefty premium if nothing happens. It also requires investment managers to actively monitor and trade a position.
As a consequence many managers prefer to engage in their own strategies for diversification. Kröll is one of them. He says: "It is essential to understand the strategy. Implementing a strategy yourself is more transparent than picking products."
Volatility products are still a "niche market" for the fund selection team at Bawag PSK Invest. For the absolute return mandates the team around Silvia Cova manages, hedging is mainly done via options and futures.
"It is much more straightforward to deal with risk budgets that way," says Bawag's Christian Staritzbichler. But he also warns of friction to exit volatility products such as trading costs, if liquidity is scarce.
Friedrich Strasser, chief investment officer at Gutmann Bank - with more than €14bn assets under management - remains sceptical. "We have seen few volatility strategies that work. We look for consistency and transparency, and have not found it yet." In addition, clients have become more risk-averse regarding hedge fund strategies.