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How a cognitive bias can lead to a diversified source of potential income?

Simon Aninat, volatility portfolio manager at Seeyond, explains how the Seeyond short volatility strategy works and which role it could play in your portfolio.

Key Highlights

  • The volatility risk premium is a consequence of a behavioral bias called the loss aversion. It can be harvested over the long term but can suffer losses in adverse conditions.
  • Risk calibration is a key issue to address to build a robust short volatility strategy.
  • Seeyond’s Volatility Risk Premium strategy aims to generate an alternative diversifying source of long term income, complementary to other asset classes.

Highlights

  • The result of regulatory requirements such as Solvency II and Basel III means that increasingly, more market participants are required to buy protection against large market drawdowns than there are those prepared to sell.
  • Having just traversed a large market and volatility shock brought about by the Coronavirus pandemic, the acute risk of a market downturn, especially one resulting from an exogenous shock, is fresh in the minds of many investors. The opportunities are now very much skewed in volatility sellers’ favour.
  • Seeyond developed and launched a Volatility Risk Premium strategy in 2017 with a performance potential and risk profile that straddles both equities and high yield credit, providing investors a robust and valuable asset allocation brick to diversify their portfolios.
This interview took place in January 2021.

Main risks of the Seeyond volatility strategies : capital loss risk, volatility-linked risk, risk related to the underlying asset, model-based risk.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

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