The current low-rate environment requires more risk-taking to generate returns. At the same time classic diversification, such as balancing equity and bond holdings, is not efficient, says fund manager Gilbert Keskin.
Keskin is the head of Convexity Solutions at French fund manager Amundi Asset Management. His team offers three strategies: directional volatility, which provides diversification via negative and asymmetric correlation; equity protection overlay, which uses options; and volatility risk premia
“Australian superannuation funds have a high level of equity. They say that is what the market wants and they not uncomfortable with that,” Keskin says.
“I would have thought that, looking at the current point in the cycle, they would want more protection.
“A number of funds do their own overlays. People are using derivatives. Most of them are doing some form of it.”
Keskin sees problems with the buy and hold put option strategies being used by most institutional investors.
“If you buy put options it will cost 3 to 3.5 per cent a year for a buy and hold strategy.
“Where we think we add value with our overlay is that we use active management and limit the cost. That is our focus. Our point of difference is that our solutions are less costly than buy and hold.
“With an active approach we get that cost down over the cycle by around one-third. We offer to sell protection with financing by selling calls. That can reduce costs by anther third.”
Keskin says Amundi offers tailored solutions. “We have been talking to funds that want something tactical and event-driven, and others that want permanent protection.”
2008 was our best year ever for Amundi’s directional volatility strategy, with a 25 per cent return.
“When markets are down, volatility is up. That is a strong correlation,” Keskin says
did 12 per cent in Q4 last year, when the market was down 10 per cent. If the
market moves suddenly, as is did then, the strategy works well.”