Ilonka Oudenampsen speaks to Amundi’s investment specialist on the volatility, arbitrages and convertible bonds team, Julia Kung, about the benefits of volatility funds

What strategies do you use for the Amundi volatility funds?
Amundi has been actively managing investment strategies since 1999 through two key investment strategies: Volatility Arbitrage and Directional Volatility. Volatility Arbitrage was launched in 1999 and seeks to take advantage of relative value opportunities arising from mismatches in supply and demand. Amundi's Volatility Arbitrage strategy focuses on four key areas of opportunity: equity index volatility arbitrage; single stock volatility arbitrage; convertible bond volatility arbitrage; and interest rate volatility arbitrage. An example of an equity index volatility arbitrage trade is to be long the implied volatility of the Eurostoxx50 and short the implied volatility of the S&P500. Another example of a trade is capturing the volatility risk premium between implied vs. realised (or historical) volatility on a basket of defensive single stock names. The strategy aims to deliver a return of Eonia + 2% per annum with a maximum annual VaR of 4%.

How does the directional volatility strategy work?
The Directional Volatility strategy, which was launched in 2005, is based on the mean-reversion of one-year implied volatility of equity indices. In periods where volatility is low (e.g 2004-2006) Amundi builds a long volatility position to benefit from rising volatility. Contrarily, in periods where volatility is already very high (e.g. 2008-2009) Amundi builds a short volatility position to benefit from volatility declining to more normalised levels. Amundi obtains exposure to one-year implied volatility through listed options and futures. Listed options offer the unique benefits of cost effectiveness, liquidity and transparency. Since Amundi's volatility funds offer daily liquidity, the ability to actively manage listed options is key to the success of the strategy, which aims to deliver a return of 7% gross per annum with a recommended investment horizon of three years.

How is your team built up?
The team is comprised of eight portfolio managers and two investment specialists. The two co-heads of the team, Eric Hermitte and Gilbert Keskin, have been working together for over 10 years, gradually building up the business to over €7 billion in assets under management (as of July 2011). The stability and long experience of the team is a key reason why Amundi has been so successful, making it one of the leaders, if not the leader, in terms of global volatility management.

What makes volatility funds attractive to pension funds?
Since the end of July and August, we have seen a real pick up in volatility. The Directional Strategy has therefore delivered decent performances (up approximately 3% in the period of 22 July to 17 August). The recent spike in volatility also means that there should be more opportunities for trading short-term fluctuations in volatility over the coming weeks and months. Higher fluctuations in volatility should provide attractive opportunities for both the Directional and Volatility Arbitrage strategies. Although volatility had been relatively subdued during the first six months of the year, this has changed dramatically with the deepening of the Euro-debt worries in July, the US downgrade in August and increasing anxiety about declining global growth. Given the ramifications of these uncertainties and the structural nature of the dual debt issue, the remainder of 2011 through 2012 should be a fitting time to be invested in volatility strategies.

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