Gilbert Keskin, co-head of volatility and convertible bonds at Amundi Asset Management, tells Francesca Fabrizi how pension funds can reap rewards from volatility

What is the main aim of the Amundi volatility funds?
The aim is to offer our clients access to volatility as an asset class, which can help them manage risk within their portfolios because of its low correlation to other asset classes, but also to generate returns for them in the medium and long-term.

Tell me about the two strategies you are currently running.
Amundi is not a new player in volatility. We entered this space ten years ago with the launch of our Arbitrage Volatility Fund, which uses long/short strategies. The idea here is to extract value from inefficiencies in the volatility market using a large investment universe including not only single stocks and indices but also interest rate volatility and convertible bonds.

In 2005, we launched a new type of strategy based solely on index volatility – our Directional Volatility Fund. This aims to extract value by taking a directional position on volatility using a mean reversion strategy, which keeps a long bias when volatility is low and a short bias when volatility is high.

Is using volatility as an asset class something new?
In the past few years we have seen a lot of new products being launched in this market. These have generally been long volatility products aimed at giving investors protection in times of crisis.

We decided, however, that we wanted to manage volatility products not on a protection basis but more on an added-value basis, and that's when you can start to consider volatility as an asset class in its own right. If you have a static allocation to volatility, in the medium to long-term you will not generate returns. You will be protected in times of crisis, but you will lose money afterwards, and in the long-term it will be difficult to maintain this type of position in a portfolio.

So if you want to consider volatility as an asset class you have to actively manage it, which means that either investors need be active themselves or they need to use an active fund like the ones we offer.

How much interest has there been from pension funds?
More and more investors are now considering volatility as an asset class, mainly for the de-correlation benefits it can bring to a portfolio.

As for pension fund interest, this has also been increasing which is exciting. At first, it was quite difficult to get their buy-in because this was a completely new asset class for them. Saying that, some had been using OTC products before the crisis and then had been quite disappointed during the difficult years because of the illiquidity of this type of product. These pension fund investors are now entering the open ended fund space to use volatility as a non-correlated asset.

How do your products meet the risk management requirements that are so high on pension funds' agendas?
All our funds have daily liquidity and are UCITS III compliant. The Arbitrage fund has a maximum VaR of 4% with a 95% level of confidence, so there we are monitoring risk very closely. We have a ten year track record now and we have shown that we are able to truly respect that limit, whatever the market conditions. We are able to manage, monitor and control our risks while also meeting our objectives.

The Directional fund has the maximum VaR allowed by UCITS III, which is 35% with a 95% level of confidence. This doesn't mean that we are managing the fund at that limit all the time – it is just a maximum. We did reach that level during the crisis, but on average it is more likely to be around the 12-16% mark. We now have a five-year track record on this fund and we have proved that we are able to manage the liquidity of the fund as well as the risk in the portfolio itself.

What are your return expectations?For the Arbitrage fund, the return objective is cash plus 2% per annum. If you look at year-on-year returns, 2008 and 2009 were very good years, as there were a lot of opportunities for arbitrage strategies. In 2004 and 2005, when volatility was low, it was difficult to reach the objective because we had fewer opportunities, which meant we were using less of the risk budget.
For the Directional Fund, the return objective is 7% per annum but with a three-year investment horizon, as the returns are less smooth. The last five years have seen very good returns.

Nothing in this article is intended to be investment advice to any person,
and no reader should rely on anything in this article when making any investment decision. This is not an offer to invest in any Amundi Fund

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