Retail Strategy with VIX Hedging

Stockholm (HedgeNordic) – Hedge funds can serve well as a building block for a retail investor’s well-diversified portfolio due to their unique characteristics. With few retail hedge funds available on the Nordic market, Global Assets co-founder Lars Semb Maalen-Johansen (pictured) is in the process of launching a quant-driven long/short equity fund for the retail audience as well as the professional investor.

“Looking at the market for retail investment funds, alternative long/short funds account for only a small proportion of the offering,” says Maalen-Johansen, who is launching GA Global Hedge in a UCITS structure “to be able to offer a hedged strategy to the everyday investor as well as the professional segment.” According to Maalen-Johansen, “the actual offering of alternative funds to the general public is very limited, and with us, they can get a fund that has the same legal structure as a long-only fund, but with downside protection and low correlation to the rest of their fund portfolio.”

“This combination creates an asymmetrical return profile for the fund.”

Licensed with the Financial Supervisory Authority of Norway, Global Assets combines a quant-driven long-only equities strategy and a continuous but dynamic exposure to VIX futures designed to protect against sharp market drawdowns. “This combination creates an asymmetrical return profile for the fund,” argues Maalen-Johansen, who co-founded Global Assets with Tore Bergan. “The downside risk is going to be a lot lower than the upside potential.” The strategy is designed to exhibit high skewness towards the right, with more outliers on the right side of the return distribution as the exposure to VIX futures protects against huge losses – outliers on the left side of the distribution.

“We don’t know when a market crash will happen, but we know it will happen at some point. This fund has some insurance policy embedded.”

“We don’t know when equity markets will crash, we have no idea,” Maalen-Johansen explains the rationale behind the continuously-embedded hedging component of the strategy. “We don’t know when a market crash will happen, but we know it will happen at some point. This fund has some insurance policy embedded.” GA Global Hedge can allocate up to 20 percent of its assets under management to VIX futures, with the allocation increasing as current implied volatility in the market decreases relative to historical volatility and vice versa.

Quant-Driven Equity Strategy

GA Global Hedge relies on a quantitative strategy to build a portfolio of around 60-70 stocks from a universe of approximately 6,000 stocks. From a palette of about ten factors styles such as value, profitability, momentum, among others, and more sub-factors or characteristics defining those factors, Lars Semb Maalen-Johansen and his team pick just one factor that has the best short-term momentum and build a portfolio of stocks that gives exposure to that factor for the month ahead. “We look into the decile spreads of all factors and sub-factors by comparing the return of the best decile versus the worst decile,” explains Maalen-Johansen. “If you look only at the best decile of stocks for return on capital employed, for instance, you cannot say with certainty whether or not this factor had a good return. The performance might have been driven by different reasons.”

“After picking the best factor of the previous month, we build a portfolio that captures that factor for the next month.”

The decile spreads offer a more clear picture of so-called factor momentum. “After picking the best factor of the previous month, we build a portfolio that captures that factor for the next month,” elaborates Maalen-Johansen. “We rebalance the portfolio every month based on which factor just performed the best the month before,” he continues. This strategy, in essence, seeks to capture factor momentum. “Of course, we will see months where there is a reversal effect, with value outperforming one month and then underperforming the next month. We continuously work on improving our models to better capture factor momentum.”

“We are working on models to help us guide us in the jungle of factors and pick the “correct” ones.”

“However, our approach is better than having static models that usually work for a limited amount of time before we see massive changes,” argues Maalen-Johansen, who provides the example of value underperforming growth since the financial crisis before market mood shifted in favor of value again. “So we are working on models to help us guide us in the jungle of factors and pick the “correct” ones.”

The Asymmetric Profile

Combining the factor-focused quant-driven strategy with the VIX exposure creates an asymmetry return profile for GA Global Hedge. The long-only equity strategy is designed to deliver a market-like return over time, with the exposure to VIX futures acting as insurance during periods of extreme market volatility. “In “normal” markets, our fund will underperform some traditional long-only equity funds, but will tend to provide a similar return profile as the general markets,” explains Maalen-Johansen. “Our strategy is meant to outperform during periods of high downside volatility. The way we will outperform over time is that we hedge the downside so well in extreme markets that you don’t have to outperform during normal markets.”

“The way we will outperform over time is that we hedge the downside so well in extreme markets that you don’t have to outperform during normal markets.”

Lars Semb Maalen-Johansen has partnered up with Swedish fund management company FCG Fonder to launch GA Global Hedge, with the fund expected to launch in first half of next year. The CIO is currently running the strategy live on the Norwegian market while working on finalizing all documentation and pre-launch processes. As soon as Norwegian Finanstilsynet and Swedish Finansinspektionen give the final green light on the launch of GA Global Hedge, both the retail and professional investor audience will have one additional choice in the universe of long/short equity hedge funds.

Global Assets skreddersyr den finansielle rådgivningen til deg slik at du får den markedstilnærmingen du ønsker.

Global Assets

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