F&C - Multi Manager Team profits from volatility hedge

F&C's Multi Manager team exited their position in the BNP Vol Edge Fund last week, taking advantage of market volatility in the wake of the sovereign debt crisis and UK election results.

The team had added 2.25% and 3.25% weightings to their Multi Manager Balanced and Multi Manager Growth portfolios on 18 March, having identified the fund as the position of choice to hedge against market volatility both efficiently and cost effectively. It invests in forward implied volatility, which generally has a negative correlation with markets and lower impact from roll costs associated with option strategies.

Paul Carne, fund manager, commented: "We began 2010 with the view that this was going to be a recovery year and as such wanted to be long risk assets. We also believed there would be periods during the year when risk aversion would rise dramatically as the markets climbed the ‘wall of worry'. Nonetheless, the events triggering these periods or when they would occur were in many ways an unknown quantity."

Southern European sovereign risk was one such potential issue. The re-emergence of these issues caused the European market to drop substantially during the first week in May whilst the six-month forward implied volatility spiked from around 23 when the team bought it in March to 41 at the close of business on Friday 7 May).

BNP Vol Edge made an impressive gain during this period, with returns in excess of 50% shielding the portfolios from the full impact of the losses elsewhere. Following this strong performance, the team moved to lock-in gains, reinvesting the sale proceeds into Jupiter Financial Opportunities and BlackRock UK Absolute Alpha.

"We are keeping our mind open to put this trade on again in the future should volatility hit our target levels once again, depending on the market environment" Carne concluded.