Structured return for all market conditions (by Allianz GI)
Allianz Global Investors has brought a volatility-focused absolute return fund to the Swiss market.
Allianz Structured Return joins an established stable of liquid alternatives absolute returns strategies. The new market-neutral strategy has a target return of 4-6%, net of fees, with an expected standard deviation of 3-4% and equity beta of just 0.15. It seeks to deliver all-weather returns for bond-like levels of risk, transforming equity exposure into consistent absolute returns, using options to remove the portfolio’s equity sensitivity and to generate non-directional premium.
The Allianz Structured Return team is led by Greg Tournant, the chief investment officer of Allianz Global Investor’s structured product group. His team seeks returns from three sources: option premiums from in-the-money calls; the dividend yield on the S&P 500 Index; and put and call directional spreads. The choice of positions provides diversification and more consistent returns.
While S&P 500 Index options are used, the strategy is not equity market driven. In a range-bound scenario, the team writes in-the-money call options to deliberately remove any equity sensitivity. The important element is the premium and how the team sets the strike price and the maturities.
The team uses a proprietary statistical analysis to calibrate strike levels and maturities such that options expire worthless in approximately 85% of cases. That still leaves 15% of cases where the market could decline below the option strike. When that happens, the team will typically cover the short position at a cost, then sell a deeper-in-the-money option to generate a further premium payment. After markets fall, higher implied volatility means the team can write new options with higher premiums to offset the restructuring outlay.
The portfolio also contains directional spreads designed to benefit from larger-than-usual equity market moves. The team also buys hedging options for the tail risk of more severe scenarios. While these insurance positions have a negative expected value, they should limit the strategy’s losses to a recoverable amount in the event of a catastrophic crash.
As Stephen Bond-Nelson – Portfolio Manager of Allianz Structured Return – points out, the strategy is designed never to try and call the market bottom, but rather to ‘capitalise on making money, even more so in volatile conditions’. The UK referendum on membership in the European Union was a good example of how the strategy can deliver in unsettled conditions. ‘We had to restructure some of our positions, but we made money on others, which is the point of having both types.’
About Allianz Global Investors
At Allianz Global Investors, we follow a two-word philosophy: Understand. Act. It describes how we look at the world and how we behave. We aim to stand out as the investment partner our clients trust by listening closely to understand their challenges, then acting decisively to provide them with solutions that meet their needs. We are a diversified active investment manager with a strong parent company, a culture of risk management.1
DISCLAIMER
1Source: AllianzGI; data as at 30 June 2016 (* Data as at 31 March 2016).
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz Structured Return is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised under the laws of Luxembourg.. The value of the shares which belong to the Share Classes of the Sub-Fund that are denominated in the base currency may be subject to a strongly increased volatility. The volatility of other Share Classes may be different. Past performance is not a reliable indicator of future results. The products or securities described herein may not be available for sale in all jurisdic¬tions or to certain categories of investors. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports, contact the management company Allianz Global Investors GmbH in the fund’s country of domicile, Luxembourg, or the issuer at the address indicated below or www.allianzgi-regulatory.eu. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de).