Lead portfolio manager, Dr Christoph Heumann, has spent 18 years in asset management since 2007, focused on multi-asset absolute return strategies and portfolio insurance. He joined HMT in Hamburg in April 2019 as Head of Research and Product Development to create new products, of which Aktien VolControl launched in December 2019 was the first.

“The concept is to build a portfolio with a return profile similar to 50% equities/50% bonds strategies, but with lower downside risk and more opportunistic potential to participate in equity market upside during certain time periods. The strategy was conceived during the zero-interest rate environment when investors sought equity return potential with lower risk. The challenge of volatility managed portfolios is to reduce risk but not expected return,” explains Heumann.

Returns, drawdowns and volatility

“The strategy is constructed based on a range of stylized facts: equities can generate substantial returns, but they also have big drawdowns. Meanwhile, realized volatility for European equities moves around in a wide range, having peaked around 75 and touched lows near to 10. Equity weights should not be fixed at 50% because that implies very different risk at different times. The equity weights should instead be adjusted to stabilize the volatility risk profile,” explains Heumann.

Volatility clustering shows that equity volatility is inversely correlated to equity returns in the same month, when the strategy will tend to reduce risk. However, an important nuance is that although higher equity volatility is contemporaneously associated with lower returns sequentially, the reverse is true. “Returns in the month following a spike in equity volatility have actually been higher on average,” points out Heumann. This sort of insight can also feed into the strategy. The model tends to react on a multiday rather than intraday timeframe. “A one-day volatility spike does not really do anything,” says Heumann.

Discretionary and quantitative elements

The strategy construction is based on several discretionary and quantitative stages.

Dynamic risk management uses GARCH (Generalised Autoregressive Conditional Heteroskedasticity) techniques to econometrically forecast the next volatility regime based on the current regime. Specifically, when volatility is high the forecast is for high volatility. Volatility scaling then helps to determine equity exposure. Historical statistical analysis shows this adds value on average; a spike upwards in volatility associated with a market peak as seen in later stages of some bull markets might result in reducing equity exposure before the market peaks, but over a full cycle the approach has been additive.

Volatility is however only one part of the formula. Equity market returns are also forecast based on some other statistical inputs: drawdowns and skew patterns in option markets. Taken together all of these can lead to higher equity allocations, which are the main driver of overall performance.

The key parameters in the analysis are purely statistical and correlation analysis: volatility estimation and expected return forecasts including drawdown and skew. “Neither fundamental macroeconomic nor technical data indicators are used because we find expected drawdown and skew are enough for our model. We want to distinguish the process from discretionary fundamental macro,” explains Heumann.

Country picks

Additional alpha can come from country and security selection, going overweight or underweight of equity markets in European countries including France, Germany, Italy, the Netherlands and Spain.

When equity exposure is low the strategy may only use the STOXX 50 future. When equity exposure in late 2023 reached high levels of 86%, the fund diversified into several other country futures, as well as long calls. “Diversifying into other country futures has slightly detracted from returns since mega caps in the STOXX 50 have been such big drivers of returns. However, the objective here is about diversifying exposure when equity volatility is high,” points out Heumann.

Stock picks and defence

The strategy can also go overweight of stocks that show low downside correlation to the equity market. Recently, there has been exposure to defence stocks such as Rheinmetall, which have generated positive alpha as Germany increases its defence spending towards the NATO target of 5% of GDP. By the end of 2024 there was already 10% in defence stocks. Incidentally there has been a change to the stock selection approach: “During the Covid crisis, single stock selection was partly guided by low volatility approaches, which worked well for a period. The low volatility approach did not work as well in 2021 and was discontinued,” says Heumann.

Options and volatility indices

The blend amongst equity index futures, equity index options and equity volatility index futures will vary over time, partly based on the level of volatility.

The strategy can also opportunistically take a view on implied volatility especially at extreme levels, using equity index options and volatility index futures for both long and short exposure. “If the volatility environment is very calm it may be worth owning some long options to build in protection. Conversely in mid-April 2025, with implied equity volatility as high as 45%, we did not want to use long volatility or options and rather preferred to have some short volatility exposure,” says Heumann. In April 2025, there was a 65% equity strangle made up of 32.5% short notional calls and puts. “Short option exposure is designed to gain in a sideways market because in a whipsaw market owning volatility can incur whipsaw costs. We would rather scale equity exposure using options to benefit from volatile sideways markets. This improves on our core building block of dynamic equity volatility control,” explains Heumann.

Equity replacement calls

The fund has also used call options to replace part of the equity exposure when volatility was low, though this is a carefully balanced judgment call. “Low volatility can result in some long calls replacing equity, though it partly depends on the skew of option pricing. If the skew is high and options are too expensive it may not be worth using options and we may use futures instead,” says Heumann.

Crash protection puts

Put options are also used for crash protection. Heumann will buy puts when they are good value and when the timing is right but does not always own them. “Puts are always expensive. One of our stylized acts is that volatility managed portfolios should on average have zero cost, which is better than either diversifying with bonds or buying puts,” he says.

Incidentally, HMT has not yet bought options on the VSTOXX (the index of implied volatility on the STOXX index) itself. “Then it would become too much like a volatility options fund and our target clients are more conservative,” says Heumann.

Varying equity exposure

Equity exposure can range from 0% to 100% and Heumann estimates it has averaged 60%. In theory the increasing deltas of put options could sometimes push the strategy into a net short position but in practice this is very unlikely to happen.

Net long exposure reached 86% in late 2023 but dropped as low as 17% around Covid in March 2020, before steadily increasing as volatility came down. “The second Corona wave at the end of 2020 in contrast saw another whipsaw market that was not ideal for dynamic volatility scaling,” says Heumann.

Over multi-year periods, Heumann expects that dynamically managing equity exposure should work better: in particular in a strong market such as 2023 the strategy has outperformed a 50% equities/50% bonds approach.

Comparison with 50/50 portfolios

Looking at discrete periods, the product has sometimes outperformed a 50% equities/50% bonds portfolio and sometimes underperformed. During Covid a drawdown of 18% compared favourably with 19.63% for a 50/50 solution or 38% for the STOXX 50. “In the first quarter of 2020 during the Corona crash the dynamic scaling generated better downside protection than diversification with bonds, and limited losses to 8.5%. In contrast during the Ukraine War in 2022, the strategy did not work as well after volatility spiked because equity exposure was not brought down as far as it should have been,” says Heumann.

More recently in 2024, net equity exposure has come down from 70% at the start of 2025 to 45% by April 2025. This was based on expected returns and volatility scaling. In the first four months of 2025, the fund’s maximum drawdown of 8% was close to the 8.2% seen on a 50% equities/50% bonds portfolio and both were lower than the STOXX 50 drawdown of 13%.

Variable volatility targets

“The volatility target is defined by subtracting a risk aversion parameter from the expected return,” says Heumann. There is no constant volatility target, though the volatility has always been much lower than having 100% in equities. Since inception it has been around 4%, versus 3% for a constant 50% equities and 50% bonds mix.

Bonds and cash management

In 2022 the fund managed to avoid losses from rising interest rates for two reasons. It does not hold bonds as part of the investment strategy, and for cash management purposes it was holding only shorter duration government bonds.

Role in portfolios

Aktien VolControl is intended to be a standalone solution. It is not a building block for HMT’s multi-strategy portfolios. Investors are mainly institutions who view the strategy as a substitute for a standard balanced 50% equities/50% bonds portfolio.