10 Dec 2018 Tarek Saffaf, Fund Manager, Greiff PARAGON UI
LH: Can you please introduce Greiff capital management to us?
Tarek Saffaf: Greiff capital management AG is a German investment management company located in Freiburg, Baden-Württemberg. Since its establishment in 2005, Greiff has grown into a specialized boutique delivering unique investment solutions. The core focus and strengths of the investment team are intelligent derivative, equity event driven and systematic equity strategies. Within the last two years, Greiff has been growing fast and overseas more than €1bn in AUM and moving forward we are keen to build on this success whilst continuing to provide quality services to our clients.
LH: Tarek, what is your background and your area of expertise?
Tarek Saffaf: I have a master’s degree in financial and economic mathematics from the Technical University of Munich in Germany and I am also a CFA Charterholder. Before joining Greiff capital management AG, I was responsible for multi-asset and absolute return products at various banks / private banks and fund boutiques. My focus is on derivative strategies with convex and asymmetric payout profiles.
LH: When did you launch the PARAGON UI fund and what is the philosophy and history of the fund?
Tarek Saffaf: The PARAGON strategy was developed in 2007 and started in 2009 in a first mutual fund as a sub-strategy. After the very good results, the strategy was launched in a separate fund in 2012. The fund is an Absolute Return fund primarily aimed for institutional or conservative investors. So far, the strategy has always delivered positive annual results and has received very good ratings and numerous awards. The strategy primarily uses derivative instruments. Options are a powerful tool that, because of their structure, can not only synthetically replicate linear payout profiles (stocks, futures), but can also create non-linear (curves) and asymmetric payout profiles. The idea of the strategy is that markets fluctuate on a monthly basis, whether sideways or in a trend. The strategy benefits from these fluctuations without making any market forecasts or predictions. The purchase of options is financed through the sale of other options. Since market fluctuations are always related to volatility (realized volatility) and the valuation of options is heavily dependent on volatility (implied volatility), volatility plays a major role in the strategy.
LH: How does it compare to other funds in the same segment and how do you differentiate yourself from the others?
Tarek Saffaf: Most option funds are designed as pure Short Vol funds. Short Vol funds have a typical long bias and are highly correlated to equity and credit markets. As an alternative beta, they therefore have no absolute return character and do not diversify a portfolio that much in our opinion. On the other hand, there are the pure long-vol funds, which pay a high carry for their position and often don’t pay off for a long time without significant and frequent market distortions. They only work as a hedging instrument. The PARAGON strategy, on the other hand, has a hybrid structure. The long-vol component is financed by the short-vol component. The sensitivity ratios (vega, delta, gamma) are therefore very different to pure short-vol funds. The Absolute Return character is preserved even in difficult times.
LH: Could you run us through the 2018-ytd performance and explain how the approach worked out?
Tarek Saffaf: 2018 was a challenging year for many strategies and asset classes. The average volatility level remained below expectations in 2018, especially with all the risks in the markets mainly in Europe, which is or was not helpful for our strategy. In February, we had the VIX flash crash with no equivalent market movement in the stock markets. As expected, our short-vol component produced a large temporary loss in this environment, but was somewhat mitigated by the long-vol component. Nevertheless, the strategy suffered a drawdown that cannot be prevented in such an environment. In the following months, the strategy was able to regain profits in the normal environment and to make up for the February drawdown. In October, there was a correction on the stock markets without a significant volatility move. Here, overall, a positive net result for October was achieved and showed the difference to pure short-vol funds which all suffered because of their beta bias. Overall, the strategy is still positive year-to date. (as of end of November 2018).
LH: If I understand it correctly, the environment over the last years was not so favourable given your sensitivity to equity market volatility? How you see this evolving in the future?
Tarek Saffaf: Volatility is important to us. Our long-vol component performs significantly better in an environment of high volatility. At the same time we also get more premiums on the short-vol side in a higher volatility environment. Since August 2016, when Donald Trump became presidential candidate, market volatility has literally collapsed. The implied volatility on average crashed by about 30%, the realized volatility even by about 50%. Nevertheless, we were able to deliver positive annual results in a difficult environment for the strategy and that is exactly what can be expected of an absolute return strategy. 2018 already brought a slight change compared to previous years. Stocks and credit markets have become more vulnerable, which is beginning to show in volatilities. We expect this process to continue in 2019. However, the transition from a low volatility to a higher volatility environment could be difficult and painful for some strategies. This requires a lot of experience and expertise.
LH: More generally, how do you judge the underperformance of numerous absolute return funds this year?
Tarek Saffaf: Many Absolute Return funds are highly beta-driven and depend on a positive performance of capital markets. Due to central bank policy and the regulation of banks in recent years, many sources of returns have not remained sufficiently lucrative. For absolute return funds it has therefore become increasingly difficult to generate a positive return after costs, which has increased the flight into supposedly well-performing beta investments. This worked well in the bullish phase, but takes a lot of revenge in falling markets. In addition, many asset classes, such as bonds and equities, are becoming increasingly correlated.
LH: How do you see the future for alternative UCITS? Will we also see increasing competition from passive investment approaches? How will you adapt?
Tarek Saffaf: Liquid alternatives will continue to play an increasingly important role in the future. However, this requires a detailed analysis of what the individual strategies are doing. Passive investments such as ETFs are increasingly combining active approaches and will push more into the alternative beta segment in the future. However, skills and experience of a manager will not and cannot be replaced by ETFs in the future.
LH: Many thanks for the interview !
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