“Thus, “meaningful relationships” are an important part of the mission, and long-standing relationships with clients have helped in order for the three initiated funds to raise over EUR 600 million in 12 months,” says co-founder, Ahmet Peker. “We were inspired by many books about corporate success, and Ray Dalio’s meaningful relationships phrase at least passively influenced us,” says co-founder, Daniel Lucke, who adds, “Having our own company with skin in the game makes a huge difference. We are a boutique focused on volatility with a lean, efficient and strong setup, and with IT systems customized to the strategy. We have a clean culture of transparency and only advise on products which we believe to be honest”.

Swift launch

The company was founded and set-up by Daniel Lucke, Ahmet Peker and Florian Astheimer. Erik Wille has been with them from the beginning and will become a Partner soon. “Being the only shareholders of the company ensures complete independence and alignment of interest,” argues Peker.

Over 10 years of volatility trading and research

Lucke’s career started in asset allocation and portfolio management for liquid alternatives and derivatives for BHF BANK. He joined FERI Trust GmbH in 2011, helped to establish the OptoFlex strategy with another portfolio manager, and later was responsible for the volatility team including portfolio management and communication with investors. Lucke is a regular speaker at conferences and a sought-after commentator for the press. “Our team’s philosophy never changed and is based on theoretically proven risk premiums. It is a robust philosophy stress tested through many environments and not fitted to any specific market scenarios. But we became more cost efficient at implementing the strategy,” says Lucke.

Astheimer was also part of the same team at FERI Trust GmbH since 2016, after joining the company in 2014 and working first in the risk overlay management department. He focused on derivatives portfolio management, quantitative modeling, and trading throughout his career and has been a CFA charterholder since 2017.

Peker was previously Head of Institutional Clients at FERI Trust GmbH, having earlier been a fund of hedge funds allocator running both offshore and UCITS products, and a quantitative portfolio manager focused on researching and implementing multi-asset style and factor premia including trend and volatility at Deka Investment. Incidentally, the commitment to establishing Empureon meant Peker, who has authored books and articles on alternative investments for students and investors, recently stepped down from chairing the German Chapter of the CAIA Association, which had held volatility events.

Utilising their gained expertise and knowledge, the team has established Empureon which is currently registered as a tied agent of NFS Netfonds Financial Service GmbH and provides investment advice as tied agent.

The Volatility One strategy

The volatility strategies Empureon advises have the same three legs as the fund OptoFlex formerly managed by the team (which has also been profiled in The Hedge Fund Journal): the premium generated through short put positions on the S&P 500 is partly used to finance long puts on the same index and call options on the VIX; all are Cboe exchange traded with no OTC instruments. The strategy should have a recognizably short volatility return profile, and there is also a short-term element of equity risk premium since the options are not delta hedged.

Each of the three legs within each package have the same maturity, in part because, “Our team saw some bad results from other funds using calendar spreads,” recalls Lucke. The choice of strikes can vary with the volatility surface and level. Take-profit rules can close some of the packages before maturity, to lock in profits. There are other rules to cover rebalancing and rolling, which also help to ensure diversification by strikes and maturities to reduce gamma and pin risk, but each package will always have three legs including the protection: “The VIX calls provide considerable convexity that can be very helpful at times. It is important to always keep tail risk hedges in the portfolio,” adds Lucke.

Lucke explains why the strategy is different from other volatility risk premium approaches which may delta hedge and/or sell both calls and puts. “The strategies are not based on delta hedging because it is trend following, expensive and a delta hedged strategy would need more leverage to achieve a similar expected return. Due to the highly negative correlation between the underlying market and implied volatility, adding more leverage while delta hedging would actually result in a higher downside beta compared to the non-delta hedged approach,” says Lucke. “The strategy only sells puts because they are overpriced, since risk averse investors are price insensitive and pay too much for puts,” he adds.

Modestly modifying the strategy

The Empureon Volatility One Fund has also incrementally modified the strategy in ways that should improve risk management and drawdown recovery. The fund has a one-year track record. Between launch in July and September 2023, the portfolio took some time to deploy large inflows and was being ramped up towards normal levels of exposure, so Empureon suggest that investors monitor the fully invested track record starting from October 2023.

Execution partly discretionary

The strategy remains close to 100% systematic, with limited discretion over timing trades within a trading day and rolls within certain time windows. “More discretion in terms of splitting positions may be exercised during times of high intraday volatility with intermittent liquidity,” says Lucke. There is also some discretion over the structuring, routing and tactics around execution. “We Germans love rules, but we as investment advisors need some flexibility regarding the initiation of trades e.g. split of positions, synchronizing multi-legs etc.”

Optimising liquidity and execution

Astheimer provides more insights into the nuances of execution: “Even though the markets for S&P 500 and VIX options are among the most liquid ones, it is crucial to have access to the relevant brokers and market makers. This reduces trading costs and ensures effective price discovery in stressed and illiquid markets such as February 2018 or March 2020. We talk to liquidity providers at the exchanges to develop a deep understanding of the micro-structure of the market.

Modelling and coding

Astheimer developed the portfolio systems, assisted by Wille, who was a professional soccer player for Eintracht Frankfurt and MSV Duisburg before entering finance. Wille had been a portfolio manager in the team at FERI Trust GmbH for over 5 years before joining Empureon. Data inputs and coding are important for modelling and trading options markets. “For our research, we use state of the art options databases, of which some are better for historical data, and others have more recent data. Coding is always work in progress. We are constantly trying to optimize systems to make them more efficient and use only proprietary models to provide the best way to view and structure the strategies we are advising. We look at packages and exposures rather than hundreds of line items,” says Astheimer. “All these lines of code will not fit into Visual Basic! This is why we are developing our own infrastructure and systems, which are tailor-made to our specific requirements,” he adds.

Reconciliations

“A derivatives fund involves multiple parties: execution and clearing brokers, administrator, custodian as well as the management company and us as fund advisor. In order for one wheel to mesh with the other, all processes must be perfectly coordinated. Starting a new company, we implemented state-of-the-art systems and technologies to make it highly automated and efficient for all parties,” says Astheimer.

Brokers

Empureon’s founders have a long-standing relationship with clearing and execution brokers. “As the three funds need the best possible market access, we are constantly working on our network,” says Astheimer.

Initial margin is typically low but can be higher in extreme conditions. “There are different margining methods in the market. Some are better suited for the strategy and some are not. The three funds have an efficient set up for margining and would have been able to meet margin requirements around Covid, for example. We always think of the worst case,” says Astheimer.

“Netting of deltas also ensures better quotes from market makers,” says Astheimer. Market makers offer tighter pricing on packaged spreads because there is less gamma risk for them to lay off than on an outright.

ESG version

There are different opinions about whether ESG derivatives need to be used for some funds reporting under SFDR category 8 or 9. Empureon’s interpretation is that, “Derivatives, the underlying indices respectively, have or will come under the “look-through” regime regarding their ESG-suitability. Therefore, we initiated a standard and a future-proof ESG-compliant version of our strategy,” says Peker. Therefore, Empureon Volatility ESG One Fund uses puts on the S&P 500 ESG index.

Liquidity in the ESG index puts partly depends on which avenues are chosen to access the market. “The S&P 500 ESG options have much less liquidity on screen but can be executed much better by voice. Since it is highly correlated with the normal S&P 500, market makers will make a fair price, but there is a wider bid/offer spread,” explains Astheimer. It is too early to be confident about the degree of divergence.

Cash and collateral

The use of green bonds for cash management in ESG products is also subject to different regulatory interpretations. Empureon recommends green bonds to a certain extent, however due to duration and diversification criteria there is a limit for it. A lot of green bonds have long time-to-maturities, and we prefer a short duration profile for the three funds,” points out Astheimer.

“Also, many brokers do not accept green bonds as collateral. In addition to green bonds, “social” or “sustainability linked” bonds could also be considered in the future.

As of August 2024, the collateral portfolio of Volatility One Fund was earning 3.6%, with an average life of 5 months. There are some floating rate notes with virtually no duration. The average credit rating is AA+. “The long-term return from the volatility strategy is expected to be 5% p.a. Adding both up gives an expected return for the fund of more than 8.5% net of fees,” says Peker.

Long equities and VRP version

A third fund, Empureon US Equity Fund, combines long exposure to the S&P 500 index with the Empureon Volatility One strategy. “The concept aims to outperform the S&P 500 Total Return Net,” says Peker.

Diversifying the investor base and product suite

“We have very strong relationships with clients, who want an established team they know well,” says Peker. “We are focused on our own network, initially in German speaking Europe. We think investors outside of this region want to see us advertising assets in our home country first,” he adds.

The investor base is mainly institutional, but a retail share class allows for B2B2C partner distribution to retail investors. Universal Investment as third-party ManCo of the funds also provides access to some passporting.

Empureon could initiate other strategies. “We are conducting research, it will take some time, but first results are promising and in-line with our philosophy of rule-based strategies and a clear and predictable return profile,” says Peker. υ