Volatility Management Strategies

These strategies aim to mitigate exposure to market volatility by setting caps on the maximum level of volatility that a portfolio can experience, in an effort to protect portfolios from excessive market fluctuations.

Introduction

Institutional investors are concerned about swings in asset prices, especially those seeking high returns from equities but struggling with the risks of short-term market swings.

To address this, some are turning to volatility-controlled strategies, known as cap volatility management strategies, which aim to reduce risks while preserving gains from volatile assets. These strategies aim to mitigate exposure to market volatility by setting caps* on the maximum level of volatility that a portfolio can experience, in an effort to protect portfolios from excessive market fluctuations.

Capped Volatility Management can be applied to the equity subset of a multi-asset portfolio or to the entire multi-asset portfolio.

Lorraine Zafrani
Head of Structured Asset Management

Benefits

Cap volatility management strategies could potentially offer several benefits for investors:
Benefits
By setting a cap on the volatility of the underlying of the strategy, investors can limit their exposure to market downturns, and potentially limit significant losses during periods of high volatility. This is especially relevant for multi-asset investors who are looking to gain exposure to stocks with limited volatility, offering a derisked and diversified strategy** to mitigate market turbulence and downside risk. By mitigating the risk of significant investment fluctuations, cap volatility management strategies help to minimise losses during the most severe bear markets.
Benefits
These strategies aim to offer a more stable investment experience by seeking to prevent the portfolio from exceeding a specific level of volatility. This stability can be particularly appealing to liability-driven Investors, and cashflow matching investors who are looking for controlled downside risk and more stability to align the flows. Cap volatility management strategies provide access to appealing asset classes typically perceived as too risky without any built-in mechanism.
Benefits
Despite the cap, cap volatility management strategies can still offer the potential for long-term growth. While reducing the impact of extreme market fluctuations, investors can still benefit (partially or totally) from the overall upward trend of the market. Cap volatility management strategies enhance the risk/return profile compared to higher risk assets.

Risks for cap volatility management strategies

Cap selection

Choosing an appropriate cap level based on the key features of the underlying is crucial in cap volatility management strategies. Investors should assess their risk tolerance and investment goals to determine the optimal cap level.

Trade-offs

Implementing a cap on a portfolio volatility may come with trade-offs. While it can reduce downside risk, it could also restrict the potential for increased returns during periods of strong market performance with high volatility.

No explicit downside protection

Selecting cap volatility management strategies for investors seeking explicit downside risk protection is not recommended. It could potentially underperform when higher risk assets consistently and steadily decrease in value.

Transaction costs

Cap volatility management strategies may result in higher transactions costs compared to a pure portfolio.

Why AXA IM?

Experienced team

The team at AXA IM has a long tenure of managing risked controlled solutions for their clients for the past 15 year, with a demonstrated history of crafting tailored solutions for large institutional investors and retail clients across multi-asset portfolios embedded in our insurance heritage DNA.

Our approach

Our experienced team utilises a well-established approach supported by proprietary quantitative tools and substantial resources in Quant Solutions, Trading, Risk Management, Responsible Investing, and other cross-functional resources to effectively structure and optimise solutions to meet specific client outcomes.

Flexibility to meet your needs

We offer flexibility in the product design throughout its lifespan, allowing for adjustments as clients' needs evolve. We maintain a collaborative mindset, ensuring customised reporting to cater to client needs.

Document

Cap volatility management strategies

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Important information

No assurance can be given that our investment strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes specific risks, liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ
    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    *There is no assurance that the portfolio's volatility will remain below the cap.
    **Diversification doesn't guarantee investment returns or eliminate risk of loss including in a declining market.