Presentación de Allianz Global Investors

1. Volatility as an Asset
Class
Allianz Volatility Strategy
Stefan Kloss
November 2013
Understand. Act.

2. Allianz Volatility Strategy
Reasons to Invest
Easy access to volatility
as an asset class
Diversification thanks to
low correlation
Allianz Volatility Strategy offers
the opportunity of participating
in the returns of volatility as an
asset class.
The strategy’s correlation with
other asset classes is mostly
low. This offers diversification
benefits.
Please see also the risks at the end of the presentation.
Excellent performance
Since its launch the fund has
registered an attractive
performance by systematically
exploiting the variance
premium.
2

3. Content
01
What is Volatility (as an asset class)?
02
Volatility as an Asset Class is Attractive!
03
Investment Philosophy and Process
04
Performance and risk
05
Appendix
3

4. 01
What is Volatility (As an Asset Class)
4

5. Volatility Strategies: different strategies, different results
Long Volatility
Flexible Strategies
•
Flexible strategies can
take both long and short
positions
•
Many of the strategies
aim to profit from mean
reversion behavior of the
volatility. The short
exposure is established
at historically low
volatility levels and the
long exposure at high
levels.

"Hedge" instrument
against rising volatility
and falling equity
markets.

The strategy is the
primary objective, which
take a long exposure to
VIX or other volatility
indices

No absolute return
profile, benefits from
volatility swings and
suffers in times of low
volatility
Short Volatility
Option Trading Strategies

The strategies seek an
absolute return by using
different combinations of
options, e.g. to achieve
short straddle;

These strategies are very
sensitive to changes in
volatility

The underlying equity
exposure is not eliminated
100%

They aim at generating
income through the
sale of Volatility, and
can for example be
realized over rolling
short variance swaps

Volatility premiums
compound over a long
period but can also
reveal high drawdowns
at high volatility jumps;
A performance of the strategy is not guaranteed and losses remain possible.
5

6. Flexible Volatility Strategies
Description
•
Flexible strategies can
take both long and short
positions
•
Many of the strategies
aim to profit from mean
reversion behavior of the
volatility. The short
exposure is established
at historically low
volatility levels and the
long exposure at high
levels.
Pros
Purpose
Cons
•
Absolute return profile,
can potentially offer good
returns in any market
phase
•
Either rules-based or
discretionary decisions
can create potential
problems.
•
Decorrelation with other
asset classes
•
In times of persistent low
volatility, performance
weakness because of
the long volatility position
•
In times of persistent
high volatility,
performance weakness
because of the short
volatility position
•
Absolute Return product
with little to no
correlation with equity
(or any other) markets
But: mean reversion is an expectation, not a rule: it just doesn’t have to happen
A performance of the strategy is not guaranteed and losses remain possible.
6

7. Flexible Volatility Strategies: An example
Volatility Fund “X”:
Flexible
Source: Allianz Global Investors via fund manager’s website. Data from April 9th, 2009 to June 13th, 2013.
7

8. Flexible Volatility Strategies: Fund vs VIX
Volatility Fund “X”:
Flexible
Source: Allianz Global Investors via fund manager’s website. Data from April 9th, 2009 to June 13th, 2013.
8

9. Long Volatility
Description
Pros

These strategies take a
long exposure to VIX or
other volatility indices

Offers protection in high
volatility environments,
especially sharp sell-offs

Benefits from volatility
swings and suffers in
times of low volatility

Acts as a hedge for
unexpected swings in
the equity market

Huge gains in very short
market stress periods
Cons

Very unattractive return
profile: not a profitable
strategy except during
very short periods of
market turmoil

Purpose
Can be a costly hedging
strategy during long
spells of low volatility

Hedging out equity risk
Long Volatility Strategies are not an asset class outright, rather a hedge for equity risk
A performance of the strategy is not guaranteed and losses remain possible.
9

10. Long Volatility: VIX Index
VIX Index
Actual performance would be much worse than the chart, since premia would have to be paid out
Source: CBOE. Data from April 9th, 2009 to June 13th, 2013.
10

11. Option Trading Strategies
Description

These strategies seek
an absolute return using
options, e.g. Short
Straddle: simultaneously
selling a put and a call of
the same underlying
security, with the same
strike price and
expiration date. Profit is
limited to the premiums
of options, but if the
underlying security's
price goes sharply up or
down, potential losses
are very high.
Pros

Absolute return profile

Potentially high
return/low volatility
profile

Work very well
regardless of market
conditions (except during
sharp selloffs)
Cons

These strategies are
very sensitive to
changes in volatility

Losses can be very high
during periods of
extremely high volatility

Purpose

Absolute return product

Decorrelation with other
asset classes

Risk profile resembles
short volatility strategies
The underlying equity
exposure is not
completely eliminated
Option trading strategies offer an attractive risk/return proposition, but are not suitable for every investor.
11

12. Option Trading Strategies: an example
Option Trading“Y”
using Short Straddle
Source: Allianz Global Investors. Data from April 9th, 2009 to June 13th, 2013.
12

13. Short Volatility Strategies
Description

Pros

Cons
Very attractive high
return/low volatility
profile


Short recovery time from
losses


They aim at generating
income through the sale
of Volatility, and can for
example be realized over
rolling short variance
swaps
Decorrelation with other
asset classes, except
during sharp volatility
increases
Can suffer high
drawdowns at high
volatility jumps;
Purpose

Absolute return product

Decorrelation with other
asset classes
The underlying equity
exposure is not
completely eliminated
Short Volatility Strategies offer a very attractive risk/return profile
A performance of the strategy is not guaranteed and losses remain possible.
13

14. Short Volatility Strategies: an example
Volality Fund “Z”: Short
Volatility
Source: Allianz Global Investors via fund manager’s website. Data from April 9th, 2009 to June 13th, 2013.
14

15. Short Volatility Strategies: the rationale
Variance Swap Profit Distribution
Source: risklab GmbH. risklab GmbH is a subsidiary of Allianz Global Investors. DJ EuroStoxx 50 data for the period 03/01/2000-31/01/2013. Implied volatility
is proxied by the VSTOXX.
15

16. 02
Volatility as an Asset Class is Attractive!
16

17. Volatility as an Asset Class is Investable and Provides a
Long-Term Chance of Positive Risk
Variance Risk Premium:
17 % occurence
20%
0%
-20%
83 % occurence
-40%
20002001200220032004200520062007200820092010201120122013
Gewinnzone
40%
Verlustzone
60%
 Variance Risk Premium: Difference between
realised variance, calculated based on daily
index levels, and implied variance, derived
from option prices.
 The variance premium is usually negative
(here: in 83 % of all observations there is a
gain), so selling variance swaps (short positions)
will result in gains.
 The average risk premium for the EuroStoxx50
during the period 01/2000-06/2013 was -3.8%.
Goal: Receive the negative risk premium by regularly selling implied volatility.
Source: risklab GmbH. risklab GmbH is a subsidiary of Allianz Global Investors. DJ EuroStoxx 50 data for the period 03/01/2000-30.06/2013. Implied variance is proxied by the VSTOXX. No
guarantee for the actual performance of the Allianz Volatility Strategy can be given. Past performance is not a reliable indicator of future results.
17

18. Distribution of the Variance Premium
The distribution of gains and losses is not symmetrical

Gains are regular and tend to be small, while
losses are comparatively rare, but larger.

A gain takes place if realised volatilities are
considerably below collected implied
volatilities (positive risk premium).

30%
If realised volatilities are clearly above
collected implied volatilities, the short
position will result in a loss.
83 % occurence of gains
25%
20%
17 % occurence of losses
15%
10%
5%
0%
-19% -15% -11% -7% -3% 1%
5%
9% 13% 17% 21% 25% 29% 33%
Movements of the variance premium: Regular, usually relatively low gains and comparatively rare, but
higher losses.
Source: risklab GmbH. risklab GmbH is a subsidiary of Allianz Global Investors. DJ EuroStoxx 50 data for the period 03/01/2000-31/10/2012. Implied volatility is proxied by the VSTOXX. There is
no guarantee for the actual performance of the Allianz Volatility Strategy.
18

19. 03
Investment Philosophy and Process
19

20. Using Variance Swaps for easy Investments in the Variance
Risk Premium
The fund sells variance swaps in order to benefit from the variance risk premium
Definition Variance swap:
A financial derivative whose payout at
maturity is equivalent to the difference
between the squared realised volatility
(= realised variance) of the underlying
during a given period and the variance
strike:
payout =
Notional of the Swap * (realized
Variance – variance strike)
1. Trading: OTC (over-the-counter)
2. Liquidity: By now very high for major equity
indices in normal market environments
3. Variance strike is equivalent to implied
variance and roughly equivalent to the
VSTOXX or VIX (new)
4. Main advantage: Permits direct participation in
the volatility risk premium
20

21. The Allianz Volatility Strategy is based on the Rules of the
Variance Premium Trading Index™ (VPT)
Details
Index
risklab Variance Premium Trading Index™ (“VPT Index”)
(Subversion: Major Markets)
Bloombergticker
RLABVPT <Index>
Investment strategy
Systematic sale of variance swaps on equity indices in the framework of a strategy completely
determined by rules
Universe
Variance swaps on EuroStoxx 50 and Standard & Poor’s 500 with lifetimes of less than 3 months
Rules
 Rules on whether a position is entered into or not
(Trading filter and money
management)
 Rules to determine the volume of a position
Main sources of returns
 Money market (“EONIA”)
 Clearly defined stop-loss limits for individual positions
 Variance risk premium (if negative, then positive returns and vice versa)
Base currency
Euro
Main risk
 At maturity of the swaps: realised volatility exceeds implied volatility or swap rate
 In the short term: significant increase in implied volatility
Further risks
Exchange rate risk concerning the USD (usually very small)
21

22. The Allianz Volatility Strategy Offers Good Diversification
Opportunities for the Portfolio
Equity
The fund is oriented
towards the Variance
Premium Trading
IndexTM (VPT).
The correlation of the
VPT Index to other
asset classes is
mostly moderate; this
applies particularly
with regard to
commodities and
bonds.
Alternative Assets
Bonds
VPT
VPT
MSCI World
DAX
Nikkei 225
Euro Stoxx 50
DJ UBS
Tremont
JPM GBI Global
1
0.61
0.50
0.47
0.52
0.38
0.59
-0.01
1
0.82
0.67
0.87
0.47
0.65
0.14
1
0.55
0.94
0.21
0.49
-0.19
1
0.58
0.34
0.54
-0.14
1
0.26
0.51
-0.13
1
0.54
0.27
1
0.13
MSCI World
DAX
Nikkei 225
Euro Stoxx 50
DJ UBS
Tremont
JPM GBI Global
Korrelation
1
<.,2
>+0.2 bis +0.6
>+0.6
Source: risklab GmbH. risklab GmbH is a subsidiary of Allianz Global Investors. Monthly data for the period 31/12/1999-30/06/2013. Monthly data in local currencies, i.e. DAX and Euro Stoxx 50 in
EUR; MSCI World, DJ UBS, Tremont and JPM GBI Global in USD; Nikkei 225 in JPY. If the currency in which past performance is described is different from the investors‘ domestic currency,
investors should bear in mind that, due to exchange-rate fluctuations, the performance may be higher or lower in domestic currency terms. Past performance is not a reliable indicator of future results.
22

23. The Investment Strategy at a Glance
 The fund (= swap seller) consists of a money-market-oriented portfolio and several variance swaps concluded with
different investment banks (= swap buyers).
 The performance of the individual variance swaps is key for the fund‘s performance.
 The counterparty selection is based, among other things, on credit ratings of the counterparties.
 The counterparties are regularly monitored by Allianz Global Investors’ proprietary risk management.
Allianz
Volatility Strategy
Money-market-oriented
portfolio
Payment of implied volatility under the
swap transactions
Counterparties
Swaps1
Variance
+
Swaps
1
Only cash settlement, no physical delivery or swap of interest returns
Payment of realised volatility under the swap
transactions
23

24. Curriculum Vitae of Fund Manager
Dr. Stefan Kloss, CAIA
Director
Senior Portfolio Manager
Stefan Kloss is a portfolio manager in the Multi Asset Active Allocation Strategies
team of Allianz Global Investors in Frankfurt. Stefan manages the Allianz Volatility
Strategy fund since inception 2009. Prior to joining Allianz Global Investors in 2005,
Stefan worked as a Manager in the Structured Credit Department of the credit insurer
Atradius and as a Systems Analyst with the consultancy McKinsey&Company. He
obtained a MSc from the KTH in Stockholm, a master´s degree in mathematics
(Diplom-Mathematiker) from the University of Karlsruhe and a PhD from the
University of Augsburg. Stefan is a CAIA chartholder.
24

25. 04
Performance and Risk
25

26. Performance Allianz Volatility Strategy in
Different Market Phases at a Glance
Dec. 2011-March 2012
In addition to the attractive
risk premium the fund
benefited from decreasing
market volatility.
positive return
140
135
130
125
negative return
Dec. 2009-Febr. 2010
Best monthly performance since launch in
December (3%). Positive returns despite
uncertainty on the markets and declining
equity prices.
June 2011-Sept. 2011
Large daily movements
and extreme implied
volatilities result in losses
which are limited by the
stop-loss strategy.
Apr.-May 2010
Extreme uncertainty and considerable
equity price swings resulted in losses.
implied volatilities more than doubled.
Oct.-Nov. 2009
No open trades due to the
trade filter. Comparable
strategies registered
losses during this period.
2nd quarter 2012
Correction involving rising
volatility due to weak
economic data and concerns
over a potential “Grexit”.
Staying in the money market
proved beneficial for fund
performance.
40%
32,0%
June 2010-May 2011
Positive performance in slightly rising equity
markets due to stable variance premiums.
2nd half of 2012
Uptrend due to improved economic
data and additional monetary stimuli
in the U.S. Fears over the stability of
the eurozone recede and volatility
decreases resulting in steady gains
for the variance swaps in the fund.
35%
30%
25%
115
15%
110
10%
5%
0,4%
0,3%
0,2%
0,6%
0,3%
0,6%
0,5%
0,7%
2,1%
2,9%
2,4%
0,1%
0,7%
2,9%
1,4%
1,9%
1,5%
0,5%
0,9%
0,8%
1,2%
0,4%
0,7%
0,6%
3,0%
0,6%
0,1%
1,4%
105
3,9%
20%
0,7%
2,0%
1,9%
0,4%
1,1%
1,6%
0,1%
120
0%
-0,5%
-0,1%
-0,1%
-0,2%
0,0%
-0,2%
0,0%
-0,6%
0,0%
-0,2%
-5,3%
-2,2%
90
-0,4%
-2,0%
95
-0,5%
100
-5%
-10%
Figures as of 30/06/2013. Source: Allianz Global Investors (AllianzGI). Calculated at the net asset value, excl. front-end load, distributions reinvested. Calculation according to BVI method
(German Investment and Asset Management Association). Past performance is not a reliable indicator of future results. Any front-end loads (for this fund currently 0,00 %) reduce the capital
employed and the performance. The volatility of fund unit prices may be strongly increased.
26

27. Extreme Intra-Day Movements Are the Strategys‘ Main Risk
 In principle, the VPT index will suffer from extreme
(positive or negative) intra-day movements of the
underlying equity index.
 However, the index losses will be significantly higher
in case of strong negative intra-day movements, as
such fluctuations usually result in a considerable
increase in implied market volatility. This will lead to
additional losses on a mark-to-market basis.
 The size of the losses stemming from market slides
will depend on the current volatility exposure, which
will fluctuate over time due to the strategy‘s rules.
 A look at the largest daily losses in the past, which
came about under different volatility exposures, shows
the following indicative losses.
Past performance is not a reliable indicator of future results.
indicative daily loss of the VPT
index
trading
day
intra-day
VIX rise in
low
medium
high
movevolatility volatiliy volatility volatility
ment
points exposure exposure exposure
S&P 500
actual
loss of
the VPT
index
19/10/1987
-20,4%
113,7
-1,4%
-7,1%
-54%
-4,75%
31/08/1998
-6,8%
4,7
-0,3%
-1,2%
-9%
-0,46%
11/09/2001
-4,9%
9,9
-0,2%
-1,2%
-9%
0,00%
15/10/2008
-9,0%
14,1
-0,5%
-2,1%
-15%
-1,59%
27

28. Allianz Volatility Strategy
Overview
-
Benchmark
Management company
Sub-manager
Risk class
Fund manager
Financial year end
Net assets
Allianz Global Investors Luxembourg S.A.
Allianz Global Investors Europe GmbH , Frankfurt
4 : conservative
Stefan Kloss
31/3/
334.11 mn. EUR
Share class
I - EUR
IT - EUR
P - EUR
P2 - EUR
PT2 - EUR
ISIN
LU041
7273579
LU041
7273652
LU041
7273223
LU0671 46552
1
LU071
9861
360
German security no.
Registered for sale in
A0RGFH
DE, LU, IT
A0RGFJ
DE, LU, ES, IT
A0RGFF
DE, LU
A1
JHRJ
DE, LU
A1
JRA5
DE, LU, ES
Fund currency
EUR
EUR
EUR
EUR
EUR
Distribution
distributing
accumulation
distributing
distributing
accumulation
M in. investment (prospectus)
1
,000,000 EUR
1
,000,000 EUR
1
00,000 EUR
50,000 EUR
50,000 EUR
Launch date
07/04/2009
1 /201
3/01 1
27/04/201
0
22/1 /201
1 1
1 /201
0/01 2
Share class volume
307.1 mn.EUR
5
-
20.02 mn.EUR
-
6.02 mn.EUR
-
currently 0.50 (max.
1
.00)
currently 0.50 (max.
1
.00)
currently 0.50 (max.
1
.00)
0.05 mn.EUR
currently 2.00 (max.
3.00)
1
.00
0.86 mn.EUR
currently 2.00 (max.
3.00)
1
.00
0.69
0.69
0.73
1
.22
1
.21
Front-end load (%)
1
M anagement fee (% p.a.)
1
Distribution fee (% p.a.)
TER (%)
2
1
Any front-end load charged at the acquisition of the fund units may accrue in full to the sales partner. The exact amount shall be mentioned by the sales partner during the investment advice
talks. This also applies to any trail fees paid by the Management Company to the sales partner from the management fee. 2 TER (Total Expense Ratio): Total cost (except transaction costs)
charged to the fund during the last financial year.
Source: Allianz Global Investors; data as at 30/08/2013
28

29. Allianz Volatility Strategy
Reasons to Invest
Easy access to volatility
as an asset class
Diversification thanks to
low correlation
Allianz Volatility Strategy offers
the opportunity of participating
in the returns of volatility as an
asset class.
The strategy’s correlation with
other asset classes is mostly
low. This offers diversification
benefits.
Please see also the risks at the end of the presentation.
Excellent performance
Since its launch the fund has
registered an attractive
performance by systematically
exploiting the variance
premium.
29

30. 05
Appendix
30

31. Implied vs. Realised Volatility
Source: IDS, data from May 2009 – October 2013. Implied Volatility shifted 30 days.
31

32. Risklab VPT Index vs. VIX Index
Source: Bloomberg.
32

33. Historic Implied Volatility: VIX February 1990 – October 2013
Source: Bloomberg.
33

34. Disclaimer
Allianz Volatility Strategy
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested.
Allianz Volatility Strategy is a sub-fund of Allianz Global Investors Fund SICAV, an open-ended investment company with variable share capital organised under the
laws of Luxembourg. The volatility of the fund unit prices may be strongly increased. 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.
This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The
products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted
by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account
the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The views and
opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated 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 willful misconduct. The
conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.
Contact the management company Allianz Global Investors Luxembourg SA in the fund's country of domicile Luxembourg or the issuer electronically or via mail at
the address indicated below for a free copy of the sales prospectus, the incorporation documents, the latest annual and semi-annual financial reports and the key
investor information document in English. Please read these documents - which are solely binding - carefully before investing.
This is a marketing communication. Issued by Allianz Global Investors Europe GmbH (www.allianzgi.com), a limited liability company incorporated under the laws
of Germany with its registered office at Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/Main, authorized and regulated by Bundesanstalt für
Finanzdienstleistungsaufsicht (www.bafin.de). The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.
34

35. 35