Performance Review 2006
Gilbert Keskin & Eric Hermitte: "The fund was incepted on 15th November 2006. From this date until the end of 2006 the fund was up +2.61% (C(C) share class). This was a period where the fund was positioned long volatility with an average vega of around +2. 1-year implied volatility of the DJ Eurostoxx50 increased from 15.30% to 16.65% allowing the fund to record gains due to its long volatility positioning. Additionally, the fund was managed to benefit from the small fluctuations in volatility of volatility over this period. In terms of gross performance contribution: the directional engine contributed 2.63% while the volatility of volatility contributed 0.15%."
Performance Review 2007
Gilbert Keskin & Eric Hermitte: "In 2007 the fund recorded a performance of +5.64% (C(C) share class). The beginning of the year from January to May 2007 was a difficult period as the fund was positioned long volatility with an average vega of around +2 while 1-year implied volatility of the DJ Eurostoxx50 remained low and stable around 16%. During the second half of the year, the fund benefitted from two spikes in volatility from 16% to 22% (June-August) and again from 19% to 22% (September-November) while the fund was positioned long volatility with an average vega of around +1.4. Vega of the fund was reduced from +2% at the beginning of the year to +1.1 by year end when volatility rose to levels of 20%. In terms of gross performance contribution: the directional engine contributed 6.91% while the volatility of volatility was negative -0.14%."
Performance Review 2008
Gilbert Keskin & Eric Hermitte: "In 2008 the fund recorded a performance of 22.58% (C(C) share class), its best year of performance since inception. This was due to the unusual circumstances that led to the eventual bankruptcy of Lehman and the global financial crisis. Since the fund was positioned long volatility with an average vega of +1 going into the crisis, the fund was able to benefit from the spike in volatility from 20% to 30% from January to September 2008. The fund reversed to a short volatility position (negative vega) once 1-year implied volatility of the DJ EuroStoxx50 spiked above 30%. The fund suffered a drawdown of approximately 11% from October 13th to November 21st as 1-year implied volatility spiked to 47%, before recovering the drawdown in just 28 days thanks to the huge fluctuations in volatility of volatility over that time. In November and December 2008 the fund recorded one of its best monthly performances due to its short volatility positioning while volatility subsided from 47% back down to 35% by year-end; and due to the volatility of volatility, which was very active towards the end of the year. In terms of gross performance contribution: the directional engine contributed +5.70% while the volatility of volatility contributed +18.54%."
Performance Review 2009
Gilbert Keskin & Eric Hermitte: "In 2009 the fund recorded a performance of 5.76% (C(C) share class). During the first 3 months, the fund recorded a slightly negative performance due to its short volatility positioning while 1-year implied volatility stayed relatively stable at around 37%. From April to July, however, 1-year implied volatility decreased from 37% to 26%, which allowed the fund to record strong gains due to its short volatility positioning. In July 2009, the fund reversed its positioning and became long volatility. From July until the end of the year the fund recorded a flat to slightly negative performance due to its long volatility positioning while 1-year implied volatility declined slightly from 26% to 24%. In terms of gross performance contribution: the directional engine contributed +1.13% while the volatility of volatility contributed +6.07%."
Performance Review 2010 - Year-to-Date
Gilbert Keskin & Eric Hermitte: "In 2010 year-to-date through September 30th, the fund recorded a performance of +7.53% (C(C) share class). The first three months resulted in flat to negative performance due to a long volatility positioning with an average vega of +0.75 while 1-year implied volatility of the DJ EuroStoxx50 declined from 24% to 22%. Then in end-April and all throughout May, the fund recorded strong performance due to several spikes in volatility from 22% to above 30% due to the Greek sovereign debt crisis spreading to the peripheral Euro zone. From June to September the fund recorded smaller gains in performance thanks to opportunistic trading of volatility, as 1-year implied volatility remained range-bound. In terms of gross performance contribution: the directional engine contributed +2.11% year-to-date while the volatility of volatility contributed +6.86% year-to-date."
Performance since 2006
Gilbert Keskin & Eric Hermitte: "Over the full period since inception of Amundi Funds Volatility Euro Equities, the fund has been able to reach its stated performance objective of 7% gross of fees on an annualized basis, with a volatility of about half of the equity markets. As you can infer from the above comments, the performance of the fund depends primarily on the positioning of the fund (long or short volatility), the level of the vega, and the evolution of 1-year implied volatility of the DJ EuroStoxx50. The active management of the fund, particularly in trading the volatility of volatility, has been a significant source of performance. In terms of gross performance contribution since inception: the directional engine contributed +18.48% year-to-date while the volatility of volatility contributed +40.78% year-to-date."
Investment Process and Strategy – How does the Fund Manager Invest?
Gilbert Keskin & Eric Hermitte: "Over a minimum investment horizon of three years, the sub-fund aims to achieve a gross performance of 7% per annum within a framework of controlled risk.
To reach this objective, the management team sets up an exposure to volatility of the DJ EuroStoxx50: positive when volatility is low and negative when volatility is high. The team buys and sells listed options with an average maturity of one year. The underlying equity risk and interest rate risk are systematically hedged by using futures. The one-year implied volatility was chosen since it represents the medium-term structural volatility of the equity market better than shorter-term indices.
The team actively manages the exposure to equity market volatility according to an indicative exposure grid. Movement of equity volatility markets across the exposure grid leads to investment decisions (see chart below of the 1-year implied volatility of the DJ EuroStoxx50 in blue). Furthermore the team has an important discretionary leeway of +/-1 vega in order to express their judgemental views on volatility. This discretionary leeway has been a significant contributor to alpha over time.
Whatever the absolute level of volatility, the fund offers the possibility to benefit from fluctuations in volatility around each threshold of the exposure grid, but also within each band thanks to the use of leeway. Rising volatility generally leads the manager to reduce the fund´s vega, i.e. selling volatility at a price higher than it was purchased. If volatility then declines, vega is gradually increased again, but at a lower price than it was sold, thus generating a net gain."
Investment Outlook
Gilbert Keskin & Eric Hermitte: "We expect volatility to stay moderately volatile throughout the rest of the year and into Q1 2011 (i.e. 1 year implied volatility to trade between 22/28% with possible spikes to 30%). There are several uncertainties in the economic environment which support this outlook such slowing growth, global currency issues and continued lack of pick up in consumption and employment in developed countries. Going forward we expect the volatility of volatility to be the main driver of performance. Given our expectation for the scenario described above, we expect to meet our performance objective of 7% gross annually.
Two alternative scenarios are possible: i) 1 year implied volatility falls to levels of 15/20%. In this scenario the fund will suffer as a result of the long volatility exposure; ii) 1 year implied volatility trades between 25/30% with spikes to 35% if current uncertainties lead to another crisis. In this scenario we expect to meet or exceed our performance objective."
