In this article we ask the three portfolio managers of the AIMS Target Return fund to explain the new ways in how they utilise options within the portfolio, the potential benefits of this and the rationale behind some of their more recent strategies.
Read this article to understand:
- Why options strategies can protect portfolio on the downside and help deliver consistent returns
- Some of the ways the portfolio managers have been employing options
- Why hires were key to making more effective use of options
Since being launched more than a decade ago, the managers of the Aviva Investors Multi Strategy (AIMS) Target Return fund have looked to make use of the widest opportunity set available, in an effort to deliver consistent returns for clients.
Unlike traditional long-only funds, AIMS can take short positions to try to profit from anticipated falls in traditional assets such as equities and bonds. It can also gain exposure to foreign exchange and commodities to try to further diversify return streams and enhance portfolio resilience.
In recent years, an improvement in the effectiveness of the team’s options strategies has been especially important. Lead fund manager Ian Pizer (IP) says this has arguably been the biggest single factor behind the fund’s ability to protect investors from some severe market downturns such as were seen throughout 2022, in March 2025 and again this spring.
Pizer says the recruitment of Patrick Bartholet (PB) in 2018 and Ralph Maison (RM) two years later, was instrumental in driving this improvement. Both hires had extensive experience of trading equity index options and other more exotic derivatives at a variety of investment banks.
Why has the use of options been benefitting the fund?
IP We hired Pat and then subsequently brought in Ralph, to essentially upgrade our coverage of options. The strength of resource and level of expertise within options that we now have in the team enables us to employ strategies more flexibly, more extensively and far more effectively which has been to our advantage over the past four or five years.
By bringing in Pat and Ralph, we have been able to change the distribution of returns to our advantage. Whilst you are giving up some upside potential by using options, you are enhancing downside protection. For a fund like ours, the real advantage of this is that you can squash returns into a much more consistent stream.
RM The two of us have a lot of experience managing a variety of derivatives which allows us to analyse and monetise opportunities across asset classes. This is both in terms of making money in its own right, and by providing cheap downside protection for the portfolio.
There are a whole host of parameters that influence an option’s price and the expected return on different option structures. We have a lot of tools that we use for analysing whether options are cheap or expensive.
But it is equally important to consider how the rest of the portfolio is constructed. For example, we might want to question the extent to which we can we rely on our bond positions to reduce equity risk and ask is this the best way of hedging this risk or could we use derivatives.
PB Unlike some, we are not simply using derivatives to augment downside protection. We are looking to improve risk-adjusted returns, taking into account the way the whole portfolio is positioned. Sometimes we may look to reduce risk via derivatives if we can find a cheap way to do so, other times we may look to achieve this by holding bonds. Flexibility is key.
The fact we come from an investment banking background is beneficial as it has given us insight into not only how banks are pricing these derivatives, but when they may be looking to recycle risk.
While some may be buying an option as it looks cheap, that experience gives you a better ability to work out whether it is cheap for a reason. It is not always what you trade. Sometimes the pothole you do not hit is equally important.
Can you provide some examples of what you have been doing?
RM One of the key positions recently has been a ‘call spread’ in options on the Chinese stock market (CSI 500 index). The rationale for the trade was twofold. Firstly the team took a view in November that the Chinese market was undervalued.
Secondly, and just as importantly, we noticed the options market was offering an opportunity to participate in the anticipated rally in such a way we could buy downside protection very cheaply.
We placed a trade that in the event the market fell would have cost just a third of what we stood to make if the market rose. We took profit on the position in January but put the trade back on again at the end of March.
I think this was a good example of how we are looking to capture the asymmetric return profiles offered by options to get a competitive advantage
PB I think this was a good example of how we are looking to capture the asymmetric return profiles offered by options to get a competitive advantage. Sometimes it might make sense to own the underlying asset if you have a strong view its price will rise. But the beauty of options is they can help you participate in that upside while capping your losses in the event the opposite happens. They offer asymmetric returns.
Furthermore, we might alter the way in which a trade is implemented several times during its lifetime, based on the outlook for the market, on volatility, and the overall makeup of the portfolio.
Sometimes we may want to have more risk and then we just buy call options. Or we may have less conviction in which case we do a spread, buying one option and selling another. We are constantly thinking about the best way to implement a trade given our views. We try to define the scenario and then look for the best payoff rather than looking for the payoff and seeing where it might fit within the portfolio.
RM Another profitable position has been gold. We generated strong returns in the six months or so to March by owning gold. While this was initially the result of owning the metal itself, as the rally persisted we shifted this exposure into call options.
This enabled us to reduce risk by monetising most of the profits we had made, while maintaining exposure to gold. As a result, when the gold price collapsed in March, we avoided a significant loss.
PB Looking further back, the fund performed strongly last spring in the run up to US President Donald Trump’s so-called Liberation Day announcement of swingeing tariffs. We felt the market was under-pricing the risk of a big correction.
In addition to selling much of our equity positions, we bought derivative contracts that paid out in the event of a spike in market volatility. We also bought some index-put options, which are designed to increase in value when the market falls.
These positions, which meant we went into the announcement effectively ‘short’ of equities, paid off handsomely when equity markets subsequently fell sharply.
Do you see options continuing to play an integral role in the way you manage the fund?
IP Absolutely. While it may seem trite to talk about uncertainty in markets, the outcome of the recent conflict in Iran was nonetheless virtually impossible to predict with any degree of confidence.
Faced with a fairly binary situation, where the market might go up say ten per cent or down ten per cent, being able to build a position where the downside risk is a fraction of the upside potential can be beneficial.
After the commencement of hostilities in February, we bought some options on the Nasdaq stock index, because we felt there was an opportunity to add risk in the expectation the conflict would be resolved. Were it to worsen, the potential losses would have been a fraction of the potential gains.
It is important to stress that while it can be favourable to use derivatives, this is not always the case
RM It is important to stress that while it can be favourable to use derivatives, this is not always the case. For example, none of our currency positions are currently via options and we have several equity and bond positions where the use of derivatives is not appropriate.
IP I would also stress that options are not a silver bullet. We’re not looking to act as a tail-risk hedge fund so you still need to be largely right when it comes to your central forecasts.
Whatever the short-term volatility, history suggests equity markets go up over the longer term. So the way we use options needs to be structured to reflect this central forecast.
We had recently been running lighter risk because of the uncertain outlook. If the Iran situation were to have escalated, a significant amount of energy infrastructure could have been taken out in the Persian Gulf.
In such a world you would want to build a very different portfolio. You cannot just say our investments will be ok if we hold onto them long enough. That is not what clients come to us for.
You are always looking at the relative pricing of the upside and downside to try to create the best risk-reward that matches your views on the market.
By investing in options, you are giving up some upside potential or paying up for something that may end up being worthless. But if you want to protect on the downside and deliver more consistent returns, you do not mind giving up some of that potential to remove the risk of sharp drawdowns.
