Allianz Structured Alpha
Aiming to generate alpha regardless of market waves
July 2016
Philosophy
A confident strategy with an insurance spirit
The Allianz Structured Alpha strategy's aim and instruments
The Allianz Structured Alpha strategy aims to provide consistent, uncorrelated returns regardless of the direction of equities and volatility.
The strategy pursues risk-controlled returns by buying and selling put and call options on US equity and volatility indexes.
The three-pronged investment objective is:
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To profit during normal market conditions.
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To protect against a market crash, hedging against extreme downside market moves.
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To navigate as wide a range of equity market outcomes as possible.
This focus on reliable returns is demonstrative of Allianz’s business as a whole – as both an asset manager and an insurer.
Set up in 2005 in the US, the Structured Alpha investment team has built a successful alternatives franchise within the infrastructure of Allianz Global Investors’ traditional asset management business.
Since then, the strategy has grown from $2 million to $4.4 billion today (as of April 2016).
Making use of volatility
A unique characteristic of the Structured Alpha strategy is pursuing a combination of long and short volatility positions via selling and buying options.
The price of options consists of two parts:
- The intrinsic value: the price of an option if it expired today. This is considered a more objective measure.
- Implied volatility, looking at whether options will become more or less valuable before expiration. This is more speculative and considered a subjective measure.
The Structured Alpha team is agnostic to implied levels of volatility and invests around the expectation where the price of an option will be at expiration. Around 95% of options are held until expiration.
The investment team is focused on equity indexes – their past, the magnitude of their movements, the fluctuations – rather than indexes measuring implied volatility, such as the Chicago Board Options Exchange Market Volatility Index (VIX), which signifies how much the options market expects equities to decline.
The team believes predicting the VIX is notoriously difficult, while the statistical analysis of S&P 500, going back almost 90 years, has provided the team with insight to predict short-term volatility within the equity index.
On average, a new option in the Structured Alpha portfolio has around six weeks to expiration, due to a statistical edge this time horizon provides.
"The strategy is proprietary and very robust, but it’s not rocket science. Generally, there’s an excess demand on puts and an excess supply of call options in the market. We quantify those options going against the decision-making process most options market participants use"
Greg Tournant, Head of Structured Product Group
Expected behavior
Structured Alpha is constructed in anticipation of any type of market environment. Its expected behaviour would be as follows:
An insurance and reinsurance inspired model
Greg Tournant explains how the Structured Alpha strategy can be indifferent to market conditions:
Structured Alpha Engine
Detailed Investment Process
Positioned for all market environments
The Structured Alpha Strategy is able to weather different market environments due to the continual optimisation of three types of building blocks.
1. Range-bound
Short-volatility positions, designed to collect option premium and to generate excess returns in normal market conditions – up, down or flat markets. As long as the equity index finishes between 7% and -12% (the profit zone) at expiration, the strategy will profit. Approximately two-thirds of the excess return Structured Alpha has generated since inception comes from range-bound positions.
2. Directional
Combination long-short volatility positions, designed to generate excess returns when equity indexes rise or fall more than usual over a multi-week period. Positions are built by buying and selling options to both the upside and downside. Approximately one-third of the excess return Structured Alpha has generated since inception comes from directional positions.
3. Hedging
Long-volatility positions, designed to protect the portfolio in the event of a market crash. Put options are purchased out of the money at various levels to the downside, and always in a greater quantity than the amount of puts sold for the range-bound positions. These long puts are in place at all times, exclusively for risk management purposes. They will have a negative expected value, unless there’s a severe downside market move, such as the Black Monday of 1987.
Portfolio Construction
The three types of positions are continually balanced in pursuit of the portfolio’s objectives, with 200-300 different option positions held at a time. The aim is to create a total portfolio effect, as explained by Jeff Sheran, Product Specialist.
"We are able to navigate as wide a range of market positions as possible. The rotations, interplay among these three enables us to be resilient"
Jeff Sheran, Structured Alpha Product Specialist
With 15-30 different expiration dates at a time, positions are staggered across time to make sure the entire portfolio does not expire on the same day. On average a new position has around six weeks to expiration, after which a new position is added.
The daily optimisation process includes considerations such as:
- At what forecasted index levels should the profit zones be constructed?
- How much time until option expiration is best?
- What mix of individual options makes the portfolio as diversified as possible?
- What strike distances are optimal for a given volatility and statistical environment?
A tested & proven solution
Consistently above target
There have been times when the strategy has underperformed, leading the Structured Alpha team to introduce a set of risk control enhancements in 2012.
The main idea behind the risk controls is to be short volatility in a low VIX environment. While a high level of implied volatility is beneficial for the strategy, a low VIX environment will be more challenging for the team.
Greg Tournant shares insights regarding drawdowns & portfolio enhancements, portfolio restructuring and hedging strategy on the following video:
Assessing performance
For prospective investors looking at the Structured Alpha strategy, Greg Tournant recommends observing the performance over a four-month time horizon (one to two portfolio rotations). With the average duration of a position just under two months, a four-month horizon allows time to see options expire and be replaced.
Delivering results
The resilience of the Structured Alpha strategy can be seen in its rapid rebound from the market correction in August 2015, with the example of Allianz Structured Alpha 250:
What would be the best market situation for Structured Alpha to generate return?
The answer is in the following video:
Always adapting...
...To different kinds of tides
How does the strategy work in different market conditions?
A performance of the strategy is not guaranteed and losses remain possible
Our newcomer
Allianz Structured Alpha 250
Allianz Structured Alpha 250
Launched in Europe in March 2016, the Structured Alpha 250 strategy has an excess return target of 250 basis points (bps) annually, with daily liquidity and an expected standard deviation of 1% to 3%.
It is constructed with a lower return and risk target than other versions of Structured Alpha, with wider profit zones for range-bound positions and a smaller quantity of positions that target higher returns and risk.
Versatile applications to investor portfolios
The Structured Alpha 250 has a bond-like risk profile, meaning it is a low-risk investment relative to equities and high-yield bonds.
- For someone holding a portfolio of fixed income and equities, Structured Alpha 250 could replace a part of the bonds allocation, helping to generate positive real alpha in a negative interest rate environment.
- For an investor who already has an allocation to alternatives, Structured Alpha 250 can form a part of the alternatives allocation, delivering a positive expected return on low risk.
Greg Tournant introduces Allianz Structured Alpha 250
Want to dive deeper?
Additional Information
Additional information on the Structured Alpha funds
Dive deeper into fund information with some key marketing material about Allianz Structured Alpha 250 and Allianz Structured Alpha Strategy.
Allianz Structured Alpha 250 advertorial
Allianz Structured Alpha 250 Pitch Book
Allianz Structured Alpha Strategy Factsheet
Allianz Structured Alpha Strategy Pitch Book
Disclaimer
Please note: A performance of the strategy is not guaranteed and losses remain possible. The statements above reflect the typical investment process applied to this strategy. At any given time other criteria may affect the investment process.
Past performance, or any prediction, projection or forecast, is not indicative of future results.
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested.
Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.
This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The information contained herein is confidential. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.
Source: Allianz Global Investors, as of July 2016
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