Lionel Florentin of Amundi explains volatility strategies and how investors can capture performance from market volatility.

Date: Jun 2011

Tags: Volatility

• To capture performance from volatility, Amundi uses both long-term and short-term trends in volatility, as well as global geographical exposure, to go overweight and underweight accordingly
• When volatility is at lower levels, this creates more challenging markets for these strategies, but this is not what the firm expects to see in the coming quarters
• Using a process implemented via mutual funds which are UCITS 3-compliant there is daily liquidity and high transparency

According to Lionel Florentin in an interview, there are three different performance engines that Amundi uses to capture performance from volatility.

The first engine is long-term trends in volatility, he explained, which involves a decision about whether to be long or short volatility, compared with an average that the firm has set at 25%.

This is a focus on implied volatility rather than realised volatility, and it’s volatility on equity indexes. Using the firm’s world process, he said the focus is on indexes like the S&P 500, Eurostoxx 50 and Nikkei 225 – creating a truly global exposure to volatility. Plus, it is only working with listed options to remain on the "safer" side from the perspective of counterparty risk.

The second performance engine is more short term in focus, said Florentin, giving the managers the capability to extract value on a short term basis through their trading activities.

The third performance engine, he explained, is the geographical exposure, where the decision is on whether to be more exposed to volatility in the US, Europe or Asia. So by overweighting and underweighting exposure to the different locations, it is possible to add value to a portfolio.

Overall, consolidating these three performance engines leads to this process being an absolute return one.

The right level of volatility

Florentin said that when markets are most volatile it creates the most interesting opportunities for the firm and its managers. During 2008, for example, it had stellar performance for its strategies, so there is clearly a need for the “raw material” of volatility to be able to create performance.

When volatility is at lower levels, this creates more challenging markets for these strategies, he said, but added that this is not what the firm expects to see in the coming quarters.

Given the various uncertainties still in the market, Florentin said he is convinced there will be spikes in the equity markets in the coming quarters.

In general, he said Amundi is well-placed to offer volatility strategies given its experience in this space over the past 10 years. The investment process started with volatility arbitrage in 1999, with the firm launching its directional process in 2005.

Akin to a hedge fund

Despite volatility strategies being used most commonly by hedge funds, Florentin said Amundi has to be very clear that it is not a hedge fund. Instead, it is a global asset management firm, created through the merger of Crédit Agricole Asset Management and Société Générale Asset Management.

The process it has implemented is incorporated in mutual funds which are UCITS 3-compliant funds with daily liquidity and therefore a very transparent process.

This makes it clear to investors where the firm positions itself in terms of volatility and what kind of performance they can expect from the investment process.