Risk control

Internal risk control is focused on position management and margin control. The fund managers closely monitor the market throughout the expiry to ensure the portfolio performs to the set target and remains balanced against risk as market conditions change. The individual positions and the strategy as a whole are constantly evaluated to ensure that it remains within the funds risk parameters.

The managers aim to ensure at all times that the following risk parameters are enforced;

  • UCITS risk metrics are complied with at all times.
  • Position is adjusted if leverage exceeds 50% of Net Asset Value.
  • Position is deleveraged if leverage exceeds 75% of Net Asset Value.
  • Aim to maintain leverage below 100% of Net Asset Value.
  • Ensure leverage never exceeds 200% of Net Asset Value.
  • Portfolio is Stopped Out if a loss exceeds 3% even if leverage remains within risk parameters and managers aim to ensure maximum loss is contained within 5%.
  • The position is not concentrated too highly in one strike to avoid potential liquidity constraints.
  • The fund managers aim to maintain an average margin allocation below 50% of the fund’s Net Asset Value.

Proprietary software updates in real time all the risk parameters in terms of profit and loss, Delta, Gamma, Vega and Theta. During the construction of the portfolio the managers intend to maintain a balanced position between upside and downside risk, for this reason it is vital to understand how the individual positions affect the dynamics of the portfolio as a whole.

Futures, Call and Put spreads are all utilised for hedging the portfolio and reducing risk. Automatic trading stops in the E-mini S&P Futures are used to control delta 24 hours a day and protect the portfolio against event risk.

Throughout the individual expiries, as the market evolves, the portfolio is stress tested to ensure the current positions are suitable and a proactive management style ensures adjustments are made timely where necessary.

Margin control is strictly monitored, as experience has shown it can often be the first warning signal when positions are wrong. The aim of the managers is to maintain an average margin allocation of below 50% of the fund’s assets.

Risk parameters are strictly monitored by all managers who are responsible for monitoring the funds positions. The managers control the position and the funds risk at all times however in order to avoid any trading bias the risk manager can enforce position closer should any metric not be strictly adhered to.

The external risk control adds to the internal one to provide an additional layer of protection on the capital of the investors; the managing company, the CSSF, the broker and the auditor all in their specific way have an important role in ensuring that the Fund is managed accordingly to the strict limits imposed by both the UCITS law and the Offering Memorandum.

Management Company: GAM is the management company of The 1.2 Fund Lux Volatility Trading and all the other compartments of the Multipartner SICAV. The Management Company is responsible for monitoring compliance with the Investment and Administrative Guidelines as well as with all applicable Legal Requirements, Fund Documents and additional Fund specific internal investment guidelines. They report guideline violations to the relevant Boards of Directors, supervise adequate mitigations against violations and decide on the handling of exceptional cases.
The Investment Controlling unit of the Risk Department of GAM is the primary responsible for monitoring on a daily basis wether the Investment Manager complies with all applicable legal investment requirements, Fund documents and additional Fund specific internal investment guidelines.
Independently of GAM Group Investment Controlling, the Depository Bank (State Street Capital) is as well responsible for controlling the adherence to legal regulations and the rules set out in the relevant Fund documents. In case of detected breaches, the Depository Bank will inform Investment Controlling of the Management Company.

Violations against investment guidelines are categorized either as active breach or as passive breach:
Active breaches occur as a result of a non-compliant transaction initiated by the Investment Manager (e.g. purchase of a non-permitted investment, purchase of a security in an amount which results in a breach of a certain limit, etc.).
Passive breaches occur as a result of market fluctuations, rating downgrades, removal of certain issuers from a benchmark or large subscriptions/redemptions, etc. Such events can lead to breaches without any transaction initiated by the Investment Manager.

CSSF: the Commission de Surveillance du Secteur Financier is the organism responsible for the financial regulation in Luxembourg; should the fund incur in an active breach the Management company will have to inform the CSSF that will act accordingly.

Broker: Our broker is an important partner to the fund and we pride ourselves on the strong relationship we have built over the years.
They maintain a strong commitment to the fund and assist in providing timely execution and risk data. They operate the standardized portfolio analysis of risk (SPAN) system as well as their own internal risk controls and procedures. The Span system is the leading margin system which has been adopted by options and futures exchanges around the world. SPAN is based on a sophisticated set of algorithms that determine margin according to a global (total portfolio) assessment of the individual portfolio of risk.

Auditor: Price Waterhouse Cooper is the auditor of the Fund and will do the annual audit; they are informed by the Management company of eventual active breaches

To ensure a better protection of the assets of the Investors the UCITS Directive states some limits in the way that UCITS funds can trade and guidelines to be followed.
The first limitation is on the elegible assets categories that funds can invest in:

  • Transferable Securities (“TS”)
  • Money Market Instruments (“MMI”)
  • TS and MMI embedding a derivative element
  • Financial Derivative Instruments (“FDI”)
  • Open-ended Collective Investment Schemes (“CIS”)
  • Deposits with Credit Institutions
  • Ancillary Liquid Assets
  • Financial Indices

Investments either directly or indirectly (i.e. through the use of derivatives) are not generally permitted in the following:

  • Property/Real Estate;
  • Commodities, including precious metals or certificates representing them, and any other nonfinancial
    indices; or
  • Private Equity.

As a general rule physical short selling is not permitted in UCITS although synthetic shorting is possible under specific conditions.
UCITS can only invest in regulated markets
Max 20% of NAV can be held in cash / deposits with the same credit institution up to a maximum of 49% of total liquidity
A UCITS fund must always appoint a Custodian (depositary) and an independent Auditor authorised and regulated in the EU. The Custodian must be based and regulated in the jurisdiction of the UCITS fund.
Managers have the ability through the use of derivatives to increase the leverage of a UCITS fund up to a total market exposure of 200% of the UCITS fund’s net asset value (Commitment Approach).