CCR Active Alpha Fund

Best Performing Relative Value - Volatility Arbitrage Fund

Originally published in the February 2013 issue

Paris-based CCR Asset Management is now owned by Switzerland’s UBS. The CCR Active Alpha fund allocates at least half of its risk budget to volatility-related strategies, and opportunistically takes directional risk in equities and fixed income. The fund itself has exhibited low volatility of 1.54% over the past year, well below its 4% volatility target. All of the strategies operate inside strictly controlled risk sensitivity limits.

For instance, exposure to vega, or implied volatility, cannot exceed 1.5. This means the fund cannot make or lose more than 1.5% for a one-point change in vega, which can be approximated as the VIX index moving from 12 to 13, or from 12 to 11. In equities, the limit is 20% so when equity risk is being taken the fund cannot make or lose more than 2% for a 10% move in stock markets. A small equity long position was opportunistically put on after Draghi’s “Whatever it takes” speech in July 2012. In fixed income the limit on duration exposure is 3, so the fund cannot profit or lose above 0.3% from a 0.1% change in interest rates or credit spreads – on the rare occasions when it has any bond exposure. An added safeguard is that any directional exposure is only obtained through limited loss derivatives.

For the management of this fund there are three portfolio managers and one portfolio risk manager. Hatem Dohni is the lead manager, head of the volatility division and equity index volatility trader. Each manager runs a sub-portfolio in a specific strategy. Antoine Lim specialises in single-stock volatility strategies, Cyril Legoeuil covers convertible bond arbitrage. Risk budgets devoted to each manager are usually rebalanced monthly, by Dohni, but this can happen more often when market conditions dictate it. The portfolio risk manager, Lorenc Golemi, defines the loss tolerance for each manager. All of the managers have more than 10 years’ experience.

In 2011 and 2012 the index volatility and convertible arbitrage strategies made much larger contributions than the single-stock volatility. The reverse applied in 2008, the most profitable year for the fund with performance in excess of 8%. In 2008 single-stock strategies made the most money, particularly after the failure of Lehman Brothers in October 2008. The longer-term, through-the-cycle performance objective is to give investors a 3% return in excess of overnight interest rates.

As well as going long or short of volatility, the fund can do relative value volatility strategies that do not entail any directional view. Under this umbrella a wide spectrum of distinctive sub-strategies can be pursued. Calendar spreads on volatility express views that near-term volatility is cheap or rich relative to longer-dated volatility.

Dohni thinks that the term structure tends to mean revert over time, so will be inclined to trade the range of calendar spreads in both directions. A “steepener” could profit from a growing gap between the maturities, while a “flattener” would make money from a convergence between longer and shorter-term volatility. Currently the fund manager thinks the selling of short-dated volatility has made the term structure too steep, so it has a flattener on that is long of June 2013, and short of December 2013.

Another volatility strategy, skew trading, could take a view on the relative values of options closer and further away from strike prices. Gamma trading aims to profit from the changing delta, or equity sensitivity, of an option that might be stand-alone or could be embedded in a convertible bond. Single-stock relative value trades could profit from convergence or divergence in option values on a pair of stocks in the same sector, such as Deutsche Telekom and France Telekom.

The fund does not have to be involved in all of these strategies at all times. The versatility of its managers and strategies lets it pick and choose which strategies best fit the shifting market climate.

Fund manager: CCR Asset Management
Portfolio manager: Hatem Dohni, Head of CCR Asset Management, Volatility Division