After a bullish year on the equity markets in 2017, the resurgence in volatility arising from Solvency II and IFRS 9 constraints could affect investment decisions. But interest rates in Europe are still as low and the need for performance is still as strong. Stay invested in equities while reducing risk and regulatory costs with CPR Euroland Premium.

WHAT IS THE FUND’S OBJECTIVE AND HOW IS IT BUILT?

CPR Euroland Premium is a eurozone equity fund hedged against extreme risks. Its objective is to deliver some of the performance of equities while reducing the negative impact of major systemic shocks like those of 2002 and 2008. On one side, the quantitative equity investment team manages the portfolio of directly-owned securities using a multi-factor approach and observing a tracking-error limit of 2%. On the other side, derivatives specialists from the diversifi ed investment team use a range of simple options strategies to actively provide structural hedging against market risk. The portfolio’s strategy positioning will mainly depend on the specifi c valuation of these options - their implied volatility - with the general idea being to take advantage of the mean reversion of this implied volatility to reduce hedging costs. To fi nance the hedging, tactical short-term put and call options strategies may also be used depending on opportunities in the equity and/or options markets.

A NUMBER OF WORRYING EVENTS HAVE OCCURRED IN RECENT YEARS, BUT IN THE END THE ECONOMY AND THE MARKETS ADJUSTED TO THEM WELL. DO HEDGED EQUITIES REALLY PROVIDE A FINANCIAL BENEFIT?

In hindsight it was better to hunker down than to run away or hide from these events - most of which were political in nature. Regarding the current situation in Europe, only time will tell what was the right thing to do. However, it is important to remember the story of the turkey which, being used to visits from the farmer, did not see the danger coming on the eve of Thanksgiving. But a more widespread risk is waiting in the wings: the high debt levels of many public and private sector borrowers, and the prospect of higher interest rates in the medium term. The monetary policy cycle and equity market volatility are “mechanically” related. A rise in US interest rates has traditionally been followed by a spike in volatility around 24 months later.

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