An LGT Capital Partners (LGT) fund has returned 25.79% year-to-date by applying a systematic futures strategy.
Pascal Spielmann, executive director at LGT and head of investment and portfolio manager of the fund, explained to Expert Investor that the strategy benefits from rising volatility.
The LGT Dynamic Protection fund aims to deliver a negative correlation to equity markets.
“Effectively, the strategy seeks to deliver a very asymmetric return profile that resembles the payoff from an equity put option but without the associated costs. Rather than paying option premiums for protection, the LGT Dynamic Protection strategy dynamically takes positions in the most liquid cross-asset financial futures,” said Spielmann.
Out of eight sub-strategies, four are ‘safe-havens’, investing in high-quality sovereign bonds, money market instruments, safe-haven currencies and gold.
The other four have a long volatility bias and invest exclusively long in volatility index (Vix) futures as well as long and short in equity indices and commodities depending on prevailing market conditions.
During turbulent times, the exposure switches to a more defensive asset mix and then back to a more aggressive mix during calm periods.
The dollar-denominated fund was launched in 2014 and has $344m (€301m) in assets under management. Since inception, it has returned 5.14% per year.
As of 3 December 2018, the strategy was renamed from LGT Alpha Generix Long Volatility, but has been managed according to the same investment policy, LGT said.
The firm explained that the renaming happened concurrent with the integration of LGT Investment Partners into LGT Capital Partners, a Swiss alternative investment specialist with $60bn of assets under management.
“The recent covid-19 crisis has seen the strategy being able to extract performance from volatility futures, commodities as well as various currencies; whereas, in earlier stress periods, gains were often extracted from government bonds or money market instruments,” he said.
As it invests in the most liquid financial futures contracts, the strategy also managed to overcome liquidity issues that emerged in the crisis, he continues (see graph below).
But while the strategy aims to be versatile in terms of possible market shocks, it is unable to react to upcoming crashes.
“It can only adapt to an unfolding crisis scenario but not foresee a future market crash. Some lead-lag effect between signal generation driven by market conditions and the subsequent risk-taking is unavoidable,” he explained.
This makes very fast unfolding events difficult for the strategy to cope with.
But these events, he added, are extremely rare and a challenge for all strategies.