Nadejda Rakovska, chief executive of start-up volatility specialist Volvar Asset Management, which is preparing to launch its first fund as a self-managed Luxembourg Sicav SIF, expects volatility to be recognised as a separate asset class that will attract increased allocations from multi-managers and balanced portfolios and prompt more players to launch funds.
GFM: What is the history and background of your company, principals and fund?
NR: Volvar Asset Management is a start-up company specialising in systematic absolute return volatility strategies. A partnership with Dutch seeding firm IMQubator for the launch of the first flagship fund was announced last December.
The firm, which is regulated by France’s Autorité des Marchés Financiers, is led by three founding partners, two of which, myself as chief executive and chief investment officer Yves Coignard, were formerly with the investment management division of Lehman Brothers.
Volvar AM will launch its first fund in the first quarter of this year as a self-managed Luxembourg Sicav SIF, structured as an umbrella fund, and expects assets in the range of EUR30m to EUR50m.
GFM: Who are your main service providers?
NR: State Street Luxembourg has been appointed as the custodian and administrator, while PwC Luxembourg is the auditor. Middle office is outsourced to State Street France and compliance to Marker CM.
GFM: What is your distribution strategy and targeted client base?
NR: Our targeted clients in Europe are mainly institutional clients, family offices, funds of funds and other portfolio managers.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
NR: The raising of seeding capital has taken longer than initially expected, and due diligence processes have also become much more detail-oriented and time-consuming. However, the crisis has also drawn attention to our investment process, which aims to produce regular performance with extra returns in times of crisis.
GFM: Please describe your investment process.
NR: We implement systematic volatility relative value strategies playing on the term structure of index volatility. We take long and short positions on volatility instruments such as volatility futures, variance swaps and options. Short positions are designed to extract risk premium, while long positions act as a super-hedge of the risk on the short leg, at a reasonable cost.
GFM: How do you generate ideas for your funds?
NR: The ideas come from our knowledge, understanding and expertise of volatility markets, combined with common sense and in-house financial research. Each idea is submitted to qualitative ex-ante scenario-based scrutiny. The subsequent back tests are used for confirmation of the expected behaviour.
GFM: What is your approach to managing risk?
NR: As a systematic fund manager, our risk management is primarily embedded in the strategy and is based mainly on ex-ante assessments of co-movements of the different risk factors of implied volatility. We add a scenario-based stress test to our positions to limit the downside risk in the event of adverse market conditions, no matter how unlikely they seem. We also look at historical value at risk.
GFM: Are you looking at any particularly attractive opportunities right now?
NR: We are paying special attention to the impact of volatility ETFs on the dynamics and valuation of volatility derivatives. We see volatility ETF managers as very useful market players, providing increased liquidity and education about the asset class. However, we think the markets in which they play are still in a pre-mature phase. The market impact of increased ETF volumes is noticeable and offers attractive trading opportunities for managers trading dislocations.
GFM: What developments do you expect to see in your investment sector or industry field in the coming year?
NR: We believe that volatility will attain its deserved status of a separate asset class. As it has the advantage of being a ‘new’ diversifying block, allocations from multi-managers and balanced portfolios are expected to gradually increase. We also expect to see more players launching funds in the volatility field.
GFM: How will these developments affect your firm and the performance of your fund?
NR: We expect increased attention and inflows. As massive inflows might trigger an unpredictable impact on prices, we are preparing the next generation of models, to integrate an additional layer of volatility into our investment processes.
GFM: What do investors currently expect from managers, and how do you deal with those expectations?
NR: Since 2008 investors have shifted their attention from past performance and name prestige to operations and performance robustness.
Specifically, they want to have a maximum of comfort about the governance of funds in which they invest, including board independence, segregation of duties and controls, to understand better the drivers of performance, and to be convinced about the value added and the business case in order to differentiate from one manager from another.
To address those expectations, we are structuring our fund as a self-managed Sicav with an independent board on which independent directors are the majority. We have also paid special attention to the selection of service providers and OTC counterparties, having in mind the necessity to avoid any potential conflict of interest.
As for the two other concerns, we have built our investment process to exclude any type of optimisation, and we stress our differentiated behaviour in bull, bear and stable equity markets.
GFM: What differentiates you from other managers in your sector?
NR: Most volatility managers focus on one of the properties of volatility, either negative correlation with underlying asset (long position) or large risk premium (short position). We combine both aspects and add a layer of dynamic risk control to produce a strategy with consistent behaviour that is to some extent predictable in identified equity market conditions.
GFM: How do you view the environment for fundraising over the coming 12 months?
NR: Fundraising will be a challenge and competition fierce, and the due diligence process will also represent an increasing workload. However, as an innovative fund specialist in a non-traditional asset class, and having paid special attention to our operational set-up, we think we will distinguish ourselves enough to attract investors.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
NR: We expect clearing of standardised OTC derivatives to impact our business positively from several points of view. First, it will reduce the overall counterparty risk our investors will carry; secondly, it will attract new players in the marketplace and therefore enhance liquidity; and it will also probably facilitate investors’ shift from traditional assets to new asset classes.