Volatility & Overlay – Volatility Risk Premium
Philosophy
Equity markets’ evolution is influenced by investors’ behavioural biases. Fear of loss is a representative example: investors are much more sensitive to the losses they might be subject to when investing in financial markets than to the gains they might benefit from. To prevent these losses, investors tend to seek protection against strong market movements and the related volatility by buying options. The sellers of these options charge a risk premium. The Volatility Risk Premium strategy precisely seeks to benefit from this risk premium and the fear of loss by structurally selling volatility.
The strategy’s objective is to seek to capture the volatility risk premium in order to provide an alternative long-term return source to traditional asset classes.
Key Points
-
An alternative source of returns
Aim to generate long term returns by capturing the volatility risk premium
-
Liquid investments
Daily liquidity through a strategy using only in liquid and listed instruments
Investment Strategy
The Volatility Risk Premium strategy consists in an active strategy of selling liquid and listed derivatives (options and index derivatives), thus seeking to avoid the pitfalls of passive strategies.
Objective
To generate a long-term return by capturing the volatility risk premium.
Investment Universe
Volatility of global equity markets (S&P 500, Euro Stoxx 50, Footsie 100, Nikkei and HangSeng indices) through liquid and listed instruments (index derivatives).
