ChampionsNews: Your fund management is targeting a return that does not depend on the economic and interest-rate cycle. What are the individual steps of the investment process?
Pansegrau: The 7orca Vega Return fund has been conceived as an attractive component for a balanced portfolio that reduces its sensitivity to macroeconomic developments. The 7orca Vega Return uses a systematic options strategy to capture volatility risk premiums in the global equity, bond and currency space.
While there is, of course, a short term correlation with each of the underlying asset classes, our strategy can generate positive returns in volatile sideways markets, prolonged recessions or hiking cycles. Traditional long-only investments cannot significantly contribute in these types of environments.
We make the volatility risk premium investable by continually selling listed put and call options. The beauty is that the volatility risk premiums can increase disproportionately in the aforementioned difficult market phases, which offers us greater return opportunities and makes our volatility strategy such a valuable long-term component for investment portfolios. The options also expire relatively quickly within up to two months. This further helps to reduce the sensitivity to prolonged market downturns that is inherent to stocks and bonds with longer duration. Options are sold in a rule-based investment process. Strict risk management complements our approach.
We make the volatility risk premiums investable by continually selling listed put and call optionsTom Pansegrau
ChampionsNews: How do you approach tactical asset allocation?
Pansegrau: I am convinced that two aspects are of prime importance: firstly, the volatility risk premium is a well-founded and systematic risk premium. And it is not limited to the stock market; rather, it can be proven to exist in many asset classes. Secondly, diversification creates significant added value for investments. It is a low-cost means of improving the risk/return profile.
We seek to put our volatility strategy on a broad foundation. That is a clear distinguishing feature and offers investors attractive opportunities for diversifying return and risks in the portfolio context. We always hold strategic investments in eight underlyings in the equity, fixed income and currency asset classes. From a tactical point of view, we employ a dynamic rotation model to capture sweet spots in the individual volatility markets.
ChampionsNews: You particularly emphasise a multi-layered risk management. How do you reduce risks?
Pansegrau: We carefully consider the risk profile in the context of the existing portfolio whenever we buy new options contracts. We diversify across underlying assets and asset classes, maturities and market levels. Each newly added option also means, of course, that we can change and manage the overall fund risk. We live by the tenet: limit risk, use opportunities. This balanced approach across our investment process is key to recovering quickly from drawdowns.
If risks exceed a certain level, we actively intervene in the existing portfolio to selectively and effectively reduce the biggest sources of risk. We do this by limiting delta, i.e. the sensitivity to changes in the price of the underlying asset. If all else fails, we will close out of the options – as ever in a rule-based and systematic process. As I said before: risk management is crucial for us.
Author: Tom Pansegrau and Timo Lüllau
Date of issue: 9/25/2018
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