Strategy
THE 1.2 FUND LUX VOLATILITY TRADING aims to achieve the investment objective by deployment of actively managed long and short positions in listed options and futures focusing on the S&P 500 Index or, as the case may be, other indices on regulated international equity markets.
THE 1.2 FUND LUX VOLATILITY TRADING further holds short term bonds, money market instruments, sight deposits and deposits repayable on demand as well as other liquid assets in order to collateralise the positions in listed options and futures.
THE 1.2 FUND LUX VOLATILITY TRADING predominantly trades front month expiry options, i.e. options with expiry on the third Friday of a month. The Subfund aims to hold a balanced exposure to both upside and downside market risks and uses protective call/put spreads and futures in order to minimise the potential drawdown from extreme market movements (so-called tail risks). Furthermore, stop-loss techniques will be used for hedging purposes. For all short positions taken by selling options, it will be determined case by case whether to hold such short position until expiry in order to maximise premium or close out prior to expiry once the value of the option has decreased substantially. Any position for which the risk of remaining in the market is deemed higher than the potential benefit will be closed out prior to expiry.
If, in the view of the Investment Manager, the level of risk in a given moment is too high in relation to the envisaged return, market exposure may be reduced and a lower monthly return may be accepted in order to reduce risk and protect the Subfund’s assets.
The portfolio is constantly monitored in real time and modelled under differing market conditions in order to determine if positions need to be adjusted.
We aim to achieve return via a disciplined, staged process, combining top down macro analysis of the global economy with technical analysis and strict risk management designed to help protect the fund against any unexpected downside or upside risk.
The fund managers follow the same tried and tested methodology in determining the optimal portfolio for each expiry relative to target return and market volatility.
Each month the fund managers try to determine the overall market consensus on the state of the global economy, the key drivers and risk factors going forward. Analysis is based on each manager’s view, drawn upon our own experience and supplemented by independent third party market research from global financial institutions and news providers.
The current level of the market, the recent trend, level of volatility and state of the global economy, are all key factors in deciding the fund’s portfolio to achieve target return. In determining the Fund’s net exposure we analyse the risks relative to reward.
For example risk factors include the level of volatility and vulnerability of the market to external shocks. If the level of risk is too great relative to required return it is possibly for the managers to decide on a lower monthly return level in order to reduce risk and protect investor’s assets.
Once the outlook on the market has been determined and the target parameters set for the month, the managers will run portfolio simulations. The portfolio simulations are a vital aspect of risk control, as it gives the managers the chance to stress test the portfolio positions at different price levels, degrees
of volatility and varying time frames.
Once the strategy for the month is determined the portfolio is constructed with trading taking place directly via our broker and the CME floor traders. The proven approach to portfolio construction for the fund is to scale into positions allowing the managers to remain dynamic in the event of changing market.