Simon Ho

An exceptional 10-year bull run coupled with lingering geopolitical uncertainty is likely to generate a spike in market volatility over the coming 12 months and demand a more defensive investment strategy, according to Triple3 Partners’ chief investment officer, Simon Ho.

Volatility is recorded via the VIX – a real-time market index that measures the market’s expectation of 30-day forward-looking volatility. It is calculated from the price inputs of the S&P 500 index options, and is a measure of implied volatility, market risk and investor sentiment.

Mr Ho said implied volatility was muted in 2019 by historical standards, and the VIX finished the year at 13.7 – although it did experience a high of 28 just after the new year (as a comparison, the VIX hit an all-time high of 80 in 2008 and its long term average sits around 16).

“It was surprising that US equity markets continued to rally during 2019 and the question is whether markets would continue their run into 2020.

“A 20 per cent rally in US equities was unusual considering the Quantitative Easing (QE) program has been in place since 2008 and markets have been bullish during this time, but US interest rate policy has been buoying the market,” he said.

As a result, he believes the market is due for a turning point in 2020 as the growth numbers don’t justify the market rally of the past two years, in particular.

“People have effectively been borrowing money for free, and when that gets taken away, there’ll be some issues. A 10 year bull market by definition has to stop at some point.

“The QE program has run its course and there’s no incentive for investors to put money into cash, so the efficacy of QE has rightly been called into question. If that’s no longer a tool of policy, what else is there? We’ve got US/China, Iran, Brexit and North Korea all simmering in the background. We need to find the source of the disruption but it’s often a spike that people aren’t expecting,” he said .

Mr Ho said in anticipation of increased volatility, investors should be looking to protect their portfolios this year and a more defensive play is required. Volatility-based funds are likely to deliver strong returns in a sell off.

“Retail investors in particular would do well to put their money into something that’s negatively correlated to equities to ensure they’re protected over the course of 2020.

“With the strong investment performance that equity investors have enjoyed since 2008, it would now be prudent for them to consider portfolio protection. Investors need to know that with every year that goes by, there’s a greater risk there will be some sort of pull back, but if you buy volatility derivatives, for example, you can get a negatively correlated performance relative to any underlying equities,” he said. 

While the US Federal Reserve has indicated it is comfortable with the current rate settings and are unlikely to dip into negative territory per some European economies, the risk of inflationary stimulation remains for investors.

“We can’t just assume that we’re not going to see inflation again, and Australian rates are at the end of their wriggle room so it’s a genuine risk that investors need to be conscious of and protect their portfolios accordingly,” said Mr Ho.

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Simon Ho

The global economic outlook is looking increasingly uncertain, with volatility set to re-appear, but opportunities exist for shrewd investors who understand the global backdrop and risks, and who do their research, says investment experts with Grant Samuel Funds Management.

Volatility is on its way and all the signs are indicating it will be with us sooner rather than later, says Simon Ho, chief investment officer of Triple3 Partners.

“There are multiple threats casting clouds over the global economy,” he says.

“We have trade wars which, if they play out, will wreak havoc on global economic growth, along with rising interest rates as stimulus unwinds in the US, Europe and Japan.

“Meanwhile, falling unemployment is exponentially increasing the inflation risk in the US.

“Throw in the oil market disruption as Iran threatens to block the Hormuz strait, to a mix of already expensive assets thanks to 10 years of unabated asset prices rises, and it is clear the threat to global economic prosperity is real.

“However withdrawing from equity markets is not the answer, as over the long run they tend to do well. Instead, with volatility looming, investors should position their portfolios to protect against a market downturn. For instance, using options over the VIX can help mitigate portfolio losses when equity markets fall,” Mr Ho says.

Stephen Miller, adviser with Grant Samuel Funds Management, also points to the increased threat of inflation in the US, with key indicators pointing to a marked acceleration in inflation.

“The Underlying Inflation Gauge (UIG) – a market measure which adds financial market information into the CPI to provide a more accurate picture – suggests that there is more inflation to come in the US, and there is a very real prospect of inflation noticeably exceeding the Federal Reserve’s ‘soft target’ of two percent.

“The Fed has recently indicated it is somewhat relaxed about this eventuality, but the extent of that relaxation may still mean four policy rate hikes of 25 basis points (bps) each in 2018.

“Nevertheless, the US budget deficit is projected to be close to 5 per cent of GDP in FY2019. With the US at full employment, demand could well spill over to imports and higher inflation,” he says.

This has implications for equity and bond markets, and Mr Miller says arguably, the outlook for both equity and bond beta is challenging.

“At the margin bond investors need to contemplate portfolios that are more flexible and access diverse sources of risk and not be tied to durations of particular indices. Obtaining beta exposure through say, an ETF, may not be sufficient going forward.

“Similarly, equity investors at the margin need to contemplate portfolios that can benefit from stock-picking acumen or the ability to offset long exposures with short exposures and so reduce exposure to equity beta.

“That markets may discount the eventuality of poorly performed bond and equity beta argues for moving sooner rather than later,” Mr Miller says.

Nick Griffin, chief investment officer with Munro Partners, agrees that the uncertain global economic environment will impact growth in the market, but there are still a number of sectors that show promise.

“We have identified several areas of interest, where we expect to see market growth,” he says.

“The top five are digital enterprise, internet disruption, digital payments, e-commence and emerging consumer and our holding in these sectors ranges from 6-12 per cent.”

Taking the example of digital disruption, Mr Griffin says it is accelerating at a fast rate.

“The rise of digital advertising, mobile advertising, social media and video streaming has fragmented the traditional media landscape. It has provided structural growth opportunities for the likes of online platforms, premium content providers and product placement beneficiaries at the expense of traditional advertising businesses.

“To provide some context, within a US advertising market of around $210 billion, we have seen digital advertising grow to $80 billion – an almost 40 per cent share. This share has been growing at 15 per cent per year since 2013.

“Consumers are changing the way they process information and are changing the way they access information and this trend will continue.

“With digital continuing to take share from traditional advertising, network effects are such that the advertising spending flows to the dominant digital platforms, such as Facebook and Google. And with digital channels making up only 22 per cent of global ad budgets, there is still room to grow.”

He says the winners from this movement will be the likes of Google, Facebook, Netflix, Alibaba and Amazon, among others.

Locally, Tribeca Investment Partners portfolio manager, Sean Fenton, says the Australian market will inevitably be impacted by global developments.

“We have become more cautious on the global risk environment,” he says.

“Domestically, there is stronger evidence that the housing cycle has peaked and this is likely to be reinforced by APRA’s efforts to rein in aggressive mortgage lending. This is being magnified by a renewed focus on responsible standards coming out of the Royal Commission and we are already seeing weakness in house prices.

“Further downside risk to the economy may emerge if the current tightening in mortgage lending standards pushes house prices lower and generates negative equity effects. State governments are effectively recycling stamp duty revenue into road and rail infrastructure which will provide some offset to weaker household consumption and the stronger terms of trade is also providing a cushion to national income.

“In terms of portfolio positioning, we have moved further underweight quality growth sectors as valuations push out to extreme levels.

“Domestically, we are positioned towards metals and new energy materials over bulk commodities within the resources sector and we are positioned more defensively in gaming and select industrials. We have increased the underweight to building materials, property developers and retail as the housing cycle rolls over.

“Globally, we are comfortable with the US growth profile and maintain overweight positions to US cyclicals and the cyclical recovery in Europe,” Mr Fenton says.

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Simon Ho

The idea that market volatility is bad and something that investors need to protect themselves against, is outdated and needs to be challenged, says Simon Ho, chief investment officer of Triple3 Partners.

“There are some persistent myths around volatility that endure regardless of markets and trends. By busting these myths, and understanding the true nature of volatility and its impact, investors can benefit from real and sustained portfolio diversification,” Mr Ho says.

The five most common volatility myths include:

1. The market has been very volatile in recent years

“Probably one of the most persistent volatility myths of recent times is that markets have been volatile and that investors need to be cautious,” Mr Ho says.

“In fact, the VIX index shows the recent period since 2015 has been the most non volatile periods of the market’s history.”

The VIX Index is a measure of expected volatility on the S&P500 Index over the next 30 days. High VIX readings mean investors see significant risk that the market will move sharply, either up or down.

“Tracking a synthetic VIX index that has been created to track back to 1928, we find that market volatility is in fact at 100 year lows. The VIX is at 9, which is unprecedented, it has never been lower. There hasn’t really been a less volatile period since the S&P began.

“Investors suffer from recency bias and media headlines do not help. While there have been volatility spikes – market movements on the back of unexpected developments such as Brexit or Trump – there has not been an ongoing period of volatility in the market beyond spikes of a few hours, or at most, a few days, during the past few years,” Mr Ho said.

2. Volatility is bad for investor portfolio

“Far from being bad for a portfolio, volatility can in fact enhance portfolio returns.

“There is no question that market volatility and falling shares prices can be bad for long-only investors over the short term.”
But volatility as an asset class is a different consideration.

“Volatility has emerged as a distinct asset class in recent years that offers a largely untapped source of alpha that can offset losses in the underlying portfolio.

“As an asset class volatility is good for a portfolio in that it is highly negatively correlated to equities. It can be accessed through the VIX Index with the use of options and volatility derivatives and it affords an investor protection in downturns.

“The average investor is long on shares and not many short the market. Market volatility creates opportunities for investors who short the market, and who make a call on which shares will fall in value – as well as which shares will increase.”

3. High volatility equals negative returns

“With the advent of VIX futures options and exchange traded products, high volatility does not necessarily mean a negative return for investors,” says Mr Ho.

“The level of volatility tends to be negatively correlated to equity indices, indicating that when equity markets fall, volatility tends to rise and vice versa.

“Options on the VIX Index allow investors to access this feature, which cannot be as reliably harnessed in other asset classes, making VIX an ideally suited instrument for targeting returns that are negatively correlated to the S&P500.”

4. Volatility is a good reason to stay out of the marke

Mr Ho says volatility actually represents a great opportunity to generate alpha in the VIX futures and options market.

“The VIX was a brand new product in 2004. VIX options have been one of the fastest growing option markets since then, and these days it is one of the most liquidly traded listed derivatives in the world.

“VIX today is front and centre of the conversation in major markets around the world and volatility options are in fact driving investors into the market. Interestingly it is retail usage of these products – particularly exchange traded products – that has driven this seismic growth.

“The most popular ETP in the US and one of the top 5 most liquidly traded securities is the VXX, which is a VIX options based product.”

5. Volatile markets mean a bubble is forming

“The exact opposite of this statement is true. Volatility is usually associated with a piercing of the bubble as opposed to a harbinger of the bubble. Non volatile markets – such as what we are experiencing now – are more likely to indicate a bubble is forming.

“For instance, while there is no volatility in the share market, definite bubbles are forming in bond markets and with house prices.”

Debunking these five common myths would help investors better understand the true impact of volatility on their portfolios, and the opportunities it can create to generate long-term returns, Mr Ho says.

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Simon Ho

Market volatility in 2017 will continue to be episodic – rather than prolonged – although asset price distortion will ultimately rectify during the year and be the forerunner of a downturn and increased average volatility in 2018, according to Simon Ho, chief investment officer, Triple3 Partners.

“This is going to be a very interesting year,” Mr Ho said.

“Despite market commentators talking about high levels of volatility in the past year, it actually was not very volatile. Although the volatility index – the VIX – rallied six percent, it started from a very low base. There were a few volatility spikes during the year – but no ongoing activity.”

Mr Ho says there will be some key drivers of market volatility in 2017.

“The first will be the US dollar. The second will be oil and commodity prices – which are intermittently linked to the movement in the dollar. The third will be interest rates and we think that the Fed could be behind the curve here, resulting in a faster pace of interest rate hikes.

“We are already seeing green shoots of inflation – even in Europe – in the most recent data. We are certainly expecting inflation in the US, and President Trump pump priming the economy, will also impact inflation.

“Any one of those three drivers could potentially cause a crack in the fabric of global economies.

“If rates surprise on the upside – and President Trump’s policies feed into that – a market downturn is inevitable for 2018.

“A depressed US market is bad news for global economies. If you look around the world, stocks globally are priced at fairly high levels, and a rapid rise in rates could see a lot of that come undone.”

In this environment investors would be well placed to position their portfolios – using options over the VIX – to prepare for these bouts of episodic volatility ahead of a potential market downturn in 2018, Mr Ho said.

“This strategy means investors can put some negatively correlated assets into their portfolio, which will help them profit from periods when markets turn down and volatility rises.

“Generally speaking, people want to own equities because over the long run they do well. Allocating a portion of the portfolio to a volatility strategy can help to mitigate or circumvent the losses that come when the markets go down.”

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Nearly two months into 2016, stock market screens remain a sea of red and headlines continue to herald a global bear market. However, it hasn’t all been bad news – markets have rebounded (often to fall again) and some stocks have defied the trend.

One word has been consistently used – volatility.

According to Simon Ho, CEO of volatility experts Triple3 Partners, the year ahead will be one of ‘episodic’ volatility, rather than wildly veering highs and lows; an environment that will create opportunities for astute investors.

Ho said the type of market volatility we have seen over the past month is what we can expect to see for the rest of this year.

“The past month is a portent of what is to come on the markets this year – bouts of volatility. It will not be calamitous as it was in 2008. It hasn’t been like that and it won’t be like that. Instead we will see small markets movements of a few per cent frequently, rather than any large GFC-like one day falls.”

What is volatility?

Volatility represents a statistical measure of the dispersion of returns for a given security or market index.

The word volatility is often used interchangeably with words associated with risk. Although it is typically portrayed as a bad thing, volatility can provide diversification benefits to an investment portfolio.

A higher volatility means that a security’s value can potentially be spread out over a larger range of values; therefore the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate significantly, but may change in value at a steady pace over a period of time.

The creation of the CBOE Volatility Index (VIX) was the first step in making volatility an investable asset class. The VIX is considered a benchmark barometer of market volatility and investor sentiment, and measures expected volatility on the S&P500 Index over the next 30 days. A high VIX reading indicates that investors expect that the market will move sharply, either up or down.

Investors can’t invest directly in the VIX; volatility can only be accessed by using options and volatility derivatives.

What are the benefits of investing in volatility?

Modern portfolio theory tell us that every asset added to a portfolio should fulfil one of two purposes:

• Provide alpha to the portfolio
• Reduce portfolio risk

Portfolio diversification has long been considered a key risk management strategy, as diverse asset classes should perform differently at various times of the economic cycle.

However, during severe market corrections, traditional relationships between assets tend to break down. The volatility of risky assets tend to rise as there is greater uncertainty and correlations across assets can increase dramatically, meaning that portfolio diversification does not always work to manage risk.

Although many alternative investments, such as hedge funds, have been held up as negatively correlated with equities, Figure one illustrates that this is not always the case.

Using the S&P/ASX200 Index (ASX200) as a base, hedge funds (as represented by the Credit Suisse Hedge Fund Index) are positively correlated with equities and become more so when this equity index drops. Australian investors using hedge funds to diversify their portfolio and hedge equity market risk would not have a satisfactory outcome.

An investment in volatility can provide diversification because volatility is generally negatively correlated to equities – and most other asset classes.

A number of academic studies have shown volatility to be causally negatively correlated to equities, as represented by the S&P500 Index; it is inversely related to equity index prices, especially when there are large moves.

This causal relationship, illustrated by figure two, enables an investor to generate negative correlation to equities. It has what’s called a ‘convex’ payoff profile – the more the S&P500 Index falls, the harder and faster the VIX tends to rise.

Periods of financial stress are often accompanied by steep declines in the sharemarket. As a result, option prices – and the VIX Index – tend to rise. The greater the fear, the higher the VIX; this explains why the VIX has become colloquially referred to as the “fear index”.

The importance of assets with a negative correlation to equities

Australians love equities. Whether direct investments, through managed funds, ETFs or superannuation, we have high levels of equity investment. According to the OECD, the average Australian super portfolio has a 50% allocation to equities (source: Pension Markets in Focus, OECD Report, 2015) with many having a much higher exposure.

At a time when equity markets are looking shaky, investors need to be mindful of sequencing risk; this is the risk that the order and timing of investments is unfavourable.

For example, a retiree may have made significant contributions to their superannuation during the past few years and be preparing for retirement; a period of negative equity returns can have a significant impact on their retirement savings.

As shown in Figure three, a loss of 20% requires a gain of 25% to recoup that loss; the greater the loss, the greater the gain required to get back to the starting point.

Investing in volatility

There are two ways retail investors can access volatility – via a managed fund that invests in VIX-based derivatives, or a managed fund with a volatility overlay.

The managed fund

A volatility managed fund will typically invest in cash and VIX-based derivatives, either futures or options. With low correlation to other asset classes, an investment in a volatility fund can be used to enhance returns and manage risk, potentially providing an additional source of alpha to a portfolio.

Volatility overlay

A volatility overlay is an investment strategy that uses derivatives instruments to manage the risk of a significant market downturn while allowing investors to retain an exposure to growth assets, therefore helping to manage both sequencing risk and longevity risk.

It is a systematic program of applying a portfolio of derivatives over a broad-based equity exposure with the aim to reduce draw-downs and in some cases, add alpha over time.

There are a number of overlay strategies used by fund managers; these include futures-based strategies, tail risk hedging, covered call writing and dynamic options strategies. For more detail on volatility strategies, refer to the article Survival strategies for turbulent markets.

There are numerous volatility overlay options available to investors. It’s important to understand the characteristics of each, how it works with each investor’s objectives and how it will impact the return profile of the investor’s portfolio.

Click here to read CPD: Strategies to survive a bear market – Part I

———

This article provides general information only and has been prepared without taking account the objectives, financial situation or needs of individuals. The information contained in this article reflects, as of the date of publication, the views of Grant Samuel Funds Management ABN 14 125 715 004 AFSL 317587 (GSFM) and sources believed by GSFM to be reliable. We do not represent that this information is accurate and com­plete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither GSFM, its related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. Past performance is not a reliable indicator of future performance. Investing involves risk including loss of capital invested. ©2016 Grant Samuel Fund Services Limited.

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Simon Ho

The year ahead will be one of ‘episodic’ volatility – rather than wildly veering highs and lows – an environment that will create opportunities for astute investors, according to Simon Ho, CEO of Triple3 Partners.

Mr Ho is the manager of the Triple3 Volatility Advantage Fund, which is distributed in the Australian market by Grant Samuel Funds Management.

“The Bank of Japan’s surprise move to cut interest rates to negative 0.1 per cent took the market by surprise last week, and is a good example of the type of episodic volatility we can expect.

“We’ve seen a month of sell-off, followed by markets screaming higher as a result of Japan’s unforeseeable move. This gives weight to the notion that we will see choppy price action in 2016.

“The past two and a half years have been an unusual time of low volatility as markets were largely insulated because of the actions of the central banks. With QE now officially at an end in the US, we are entering a new market environment,” Mr Ho said.

“It is no surprise that ructions have been felt in markets everywhere from late December until now. The lynchpin was always going to come when the central banks starting taking back QE.

“The market has sold off pretty aggressively over the past month and I don’t think it can be sustained. I would expect there to be a bounce.

“The US decision to raise rates in December, followed by the rally of the $US, resulted in commodities tipping over. In particular the oil price has been brought to the fore as the dominant feature.

“While we didn’t necessarily anticipate the commodities rout – it is this rout that has caused much of the upset in markets.”

Mr Ho said the type of market volatility we have seen over the past month is what we can likely expect to see for the rest of this year.

“The past month is a portent of what is to come on the markets this year – bouts of volatility. It will not be calamitous as it was in 2008. It hasn’t been like that and it won’t be like that. Instead we will see small markets movements of a few per cent frequently, rather than any large GFC-like one day falls.”

Despite the market movements we have seen over the past month, Mr Ho says the VIX index – a measure of volatility on markets – has been quite muted.

The VIX measures expected volatility on the S&P500 Index over the next 30 days. If investors expect that the market will move sharply (either up or down), the VIX will give a high reading.

“The average level of the VIX since its inception in 1990 has been at around 19. When markets experienced extreme volatility in August 2014 the VIX spiked intraday to well above 40. Today it is sitting at 22 and has been around this level for most of the month of January.”

Mr Ho says events that will affect volatility in markets over the coming year include interest rate movements by the US Federal Reserve, along with any further $US rally.

“The outlook for 2015 ultimately comes down to rates and unless the US economy unravels, which is unlikely, the Fed is committed to raising rates.”

In particular a rally in the $US will continue to negatively impact emerging markets, Mr Ho said.

“Since the beginning of QE many emerging markets have increased their levels of debt. With their debt measured in $US, the rally in the $US has made their debt position worse.

“If the $US continues to rally, more emerging markets will be squeezed.”

The other looming uncertainty for markets in 2016 is China.

“China has mishandled its economy in recent times and its actions are causing consternation among the central bankers.

“Although a number of Chinese companies issued statements to the Chinese exchange recently, reassuring investors that their largest shareholders were not planning to sell down, the suspicion is that the statements were orchestrated by the Chinese government which undermined the effectiveness of the message.

“China is important to the global economy and the Chinese government hasn’t clearly articulated to the world how they are going to respond to their economic challenges.

“The measures that they have taken so far are not the measures that other central banks have taken, and they have not been successful. The world’s faith in China has been shaken, and China will continue to be the Wild card in 2016.”

For investors in volatility however, a steady VIX level in the mid 20s for the bulk of the year would not be a bad outcome.

“For the VIX to be sitting at 22, it means volatility is sitting at about 1.5 per cent, which means there is plenty of activity in markets.”

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Simon Ho

Grant Samuel Funds Management (GSFM) has launched a new fund combining the expertise of Epoch Investment Partners’ shareholder yield strategy and Triple3 Partners’ volatility management strategy.

Called the Grant Samuel Global Equity Advantage Fund, it is designed to enable investors, particularly those close to or in retirement, to retain an exposure to global equities while mitigating the potential loss of capital.

Mr Damien McIntyre, director and head of distribution with Grant Samuel Funds Management, said the fund seeks to maintain the significant capital gains investors have made in markets in recent years, and to help investors manage equity market volatility and drawdowns in a cost effective way.

“The average life expectancy is increasing and many retirees face the very real prospect of outliving their retirement savings. There is no question that investors need growth assets, but fear can drive them toward low risk investments that have little potential for capital growth or keeping pace with inflation,” Mr McIntyre said.

“As well, the issue of sequencing risk, which is the risk that the order and timing of investment returns is unfavourable, is top of mind for many retirees. The wrong sequence of returns can have a big impact on a retirement portfolio.

“Volatility in markets and the order in which investment returns occur can make a big difference to the capital base once investors begin to draw on their retirement savings. If investors experience positive investment returns in the first few years of retirement, they will be better placed to ride out market downturns.

“However, if returns early in retirement are negative, then proportionally more capital is required to fund ongoing living expenses. This was the case for many retirees during the GFC; they were regularly withdrawing from a diminishing capital base, which significantly reduces the possibility of being able to recoup losses over time.”

The Grant Samuel Global Equity Advantage Fund aims to address these concerns, by combining the expertise of global equity specialist Epoch, which manages the underlying fund – the Global Equity Shareholder Yield strategy – and Sydney based volatility experts Triple3, which manages the options based volatility overlay that seeks to mitigate the risk of capital loss in the underlying fund.

Simon Ho, founder and chief investment officer of Triple3, said the options overlay aims to limit downside risk without constraining the upside.

“A growth investment with a volatility overlay allows retirees to maintain the exposure they need to growth assets to mitigate longevity risk, while providing a buffer that aims to limit the downside and help manage sequencing risk.”

The Fund aims to achieve a superior risk adjusted returns (before fees) over the medium to long term while maintaining a lower level of volatility than the benchmark. It aims to provide quarterly income derived from two sources: the investment in the underlying fund and income from its option strategy. It is aimed at:

• investors who need growth but are concerned about market volatility
• income investors who need to look beyond term deposits in a low interest rate environment
• retirees worried about loss of principal but requiring growth and income to maintain their lifestyle
• alternative investors looking for absolute returns strategies.

The underlying fund is unique in the Australian market as it offers a diversified equity portfolio of listed global companies with a history of attractive dividend yields and positive growth in free cash flow. Companies in the portfolio are run by management that focus on creating value for shareholders through consistent and rational capital allocation policies, with an emphasis of cash dividends, share buy-backs and debt reduction – the key components of shareholder yield.

The options based overlay, managed by Triple3, aims to smooth and reduce the volatility of returns in the underlying fund. By entering into options contracts, which generally move in the opposite direction to the underlying fund, the options overlay seeks to smooth returns so that the value of the fund does not fall as far as the underlying fund in times of market stress.

Download the Grant Samuel Global Equity Advantage Fund FAQ here.

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Simon Ho

The Triple3 Volatility Advantage Fund has been named the Lonsec Innovation Award Winner for 2015 at the 13th annual SuperRatings Fund of the Year Awards.

The Lonsec Awards highlight and recognise excellence in the industry. To choose the winners Lonsec uses a mix of qualitative and quantitative measures to identify high achieving funds managers and investment products that stand out from their industry peers.

The Lonsec Innovation Award aims to identify funds which stand out from the pack – particularly those which have tackled investment solutions from a different angle than most peers, or are simply doing it better or more efficiently.

Simon Ho, CEO of Triple3 Partners, says the Triple3 Volatility Advantage Fund aims to generate long-term absolute returns with its volatility-focused strategy to capture alpha from highly liquid exchange-traded VIX options, which are negatively correlated to equities.

“With volatile markets set to continue to challenge investors, the Triple3 Volatility Advantage Fund fills an important gap in the market – that of real and sustained portfolio diversification.

Andrew McKinnon CEO of Grant Samuel Funds Management, which distributes the fund in the Australian market, says the award is recognition of the success of the Fund’s investment approach.

“Simon Ho and his team have spent six years developing their volatility strategy, including the quantitative forecasting techniques and portfolio algorithms that underpin the strategy used in the Triple3 Volatility Advantage Fund. This award is a vindication of the success of that model, and the innovative nature of the fund.”

Triple 3 Partners was established in 2009 to provide volatility strategies to institutional clients, including alpha strategies, volatility overlay and volatility research. In addition to a role as an investment manager, Triple3 is a dedicated volatility research house and sells its research to professional investors as well as consulting to stock exchanges around the world.

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Simon Ho

Triple3 Partners have warned that quantitative easing, an expected increase in global interest rates and falling oil prices will present investors with a challenging set of circumstances in 2015.

“The investment environment for 2015 will be very different to last year, and investors should be prepared for new challenges as well as new opportunities,” says Mr Simon Ho, founder and chief investment officer of Triple3 Partners.

Mr Ho is the manager of the Triple3 Volatility Advantage Fund, which is distributed in the Australian market by Grant Samuel Funds Management.

“The actions last week of the European Central Bank, which surprised the market to the upside, were significant and set the scene for the volatility that lies ahead,” Mr Ho says.

“After two very benign years in global markets, there will be volatility and movement in asset prices that we haven’t seen in some time.

“Until now, the focus has been on quantitative easing (QE) and markets are inflated as a result of QE, which is what you would expect. Now the focus will move beyond QE and global markets will no longer be seen as a homogenised mass.

“Following five years of a US equity bull market run, which in the last stage in 2014 saw an expansion of PE ratios, suggesting prices were increasing without justification, more volatility will be evident.”

This will be partly as an unwinding of QE, and partly as a result of the US Federal Reserve increasing interest rates. The collapse of the oil price is also very significant.

“After a period of laying dormant, foreign exchange markets will also experience volatility. The Euro is being battered and the decrease in the oil price means the currencies of those economies heavily reliant on oil production will suffer.

“Those emerging markets that are reliant on oil production will see more volatility.

“Russia is already suffering from the sanctions against it. But other oil production counties, such as Venezuela, will also be affected.

“Similarly, as Chinese growth rates – which are already at their lowest levels since 1990 – continue to slow, commodities such as iron ore and coal will continue to be under pressure.”

Mr Ho says this expected volatility creates opportunities for investors.

“Although most investors see volatility as simply a measure of risk, it is also an asset class in and of itself, and one that offers investors portfolio returns that are largely uncorrelated to equities,” Mr Ho says.

Mr Damien McIntyre, director and head of distribution with Grant Samuel Funds Management, says an investment in volatility can be accessed through VIX options, which have been one of the fastest growing option markets in recent years.

The VIX Index, also called the Fear Index, measures expected volatility on the S&P500 Index over the next 30 days.  If investors expect that the market will move sharply (either up or down), the VIX will give a high reading.

“Volatility is usually negatively correlated to equity markets, so that when equity markets fall, volatility tends to rise, and vice versa. Investing in options on the VIX Index allow investors to access this negative correlation, which cannot be as reliably harnessed in other asset classes, making VIX well suited to targeting returns that are negatively correlated to the S&P500,” Mr McIntyre says.

“VIX options now rank up with the world’s most liquid – and have been known to trade over 1 million options contracts per day,” Mr Ho says.

The Triple3 Volatility Advantage Fund aims to generate long-term absolute returns with its volatility-focused strategy to capture alpha from these highly liquid exchange-traded VIX options.

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Simon Ho

Grant Samuel Funds Management and Triple3 Partners have warned investors not to take market returns for granted, as the CBOE volatility index – the VIX – hits near record lows.

The VIX index, often referred to as the Fear Index, is a measure of expected volatility on the S&P500 Index over the next 30 days. High VIX readings mean investors see significant risk that the market will move sharply, either up or down.

The VIX hit a low of 11.32 in May, and in the past a low VIX has frequently been a harbinger of significant market falls, says Mr Simon Ho, founder and chief investment officer of Triple3 Partners.

“This period could be the calm before the share market storm,” he says.

“The last time the VIX was at these low levels was at the start of 2007, the period immediately before the onset of the GFC.

“I expect that volatility levels will start to climb higher by the end of 2014, with a lot of uncertainties ahead for world economies.

“There is the housing bubble in China which will start to deflate at some point, the experimental quantitative easing taking place in Japan which will have unknown consequences, and the US’ decision to unwind its quantitative easing program which should see asset prices and risk premiums in that country return to more normal levels.

“Throw into the mix the conflagration in Eastern Europe, and the Euro-zone being on the verge of deflation, and you have a number of banana skins on the road ahead, waiting to trip-up the unwary.

“The backdrop against this is that equities are very fully priced. We have seen five years of a bull market where the S&P has gone from a low of 666 to sit at its current levels above 1900.

“Investors can’t afford to be complacent about their portfolio diversification,” Mr Ho says.

Along with a mix of equities, bonds, cash, alternatives and property, investors can also diversify by investing in volatility itself.

“Most investors see volatility as risk, but it is increasingly being recognised as a distinct asset class, and one which offers a largely untapped source of portfolio returns that are largely uncorrelated to equities.

An investment in volatility can be accessed through the VIX with the use of options and volatility derivatives. Mr Ho says it is a good natural diversifier.

VIX options have been one of the fastest growing option markets in recent years and now rank as one of the world’s most liquid – regularly trading over 1 million options contracts per day.

The Triple3 Volatility Advantage Fund, which is distributed in the Australian market by Grant Samuel Funds Management, aims to generate long-term absolute returns with its volatility-focused strategy to capture alpha from highly liquid exchange-traded VIX options, which are negatively correlated to equities.

Mr Damien McIntyre, director and head of distribution with Grant Samuel Funds Management, says: “The investment strategy is expected to perform best in periods where the S&P is falling. In periods where the S&P is choppy, the investment strategy is expected to generate positive returns, and where the S&P remains stable or increases only steadily, the investment strategy is expected to generate cash-like returns.”

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