W&F December 2017

www.wealthandfinance-news.com 12 Wealth & Finance International - December 2017 Investors are, unsurprisingly then, looking for investment strategies to protect themselves from market shocks, often labelled as Crisis Risk Offset (CRO), Crisis Protection, Tail Risk Protection or something similar. Such approaches attracted $6.6 billion of investor inflows in 2016 according to HFRI, the hedge fund data provider. The strategies blend a range of asset classes and strategies expected to outperform when markets fall. Most try to capture some form of trending market behaviour (positive or negative) across different markets. A typical institutional allocation is in the region of 10% of the overall portfolio. Sounds interesting - what kinds of asset classes would they invest in, and why? Some approaches allocate to long duration US Treasury bonds as the “flight to quality” means that Treasuries appreciate significantly in the initial phases of a crisis. An allocation to trend following systematic global macro gives access to momentum-based strategies that are expected to perform well when a crisis is confirmed. Alternative risk premia strategies systematically aim to capture the long-term returns of certain well-known risk premia, for example, value, size and quality. And other strategies are long options on volatility, benefitting when markets sell off and volatility rises. This return-offset feature is the primary purpose. If it fulfils this objective, the return pattern of the investor’s overall portfolio will benefit from reduced losses during periods of traditional asset market declines. The strategies have several benefits. By hedging market falls through shorting, they provide valuable diversification. The level of protection provided is relatively cheap. Funds can be withdrawn in a matter of days as the underlying investments (equities and derivatives) are implemented in deep and liquid markets. And importantly, these strategies can provide a source of capital when markets fall that can be deployed if attractive investment opportunities appear. What kind of investors are already allocating, who are the early adopters? Many of the investors considering CRO products are pension funds and insurance companies which cannot afford to incur heavy losses given their contractual liabilities. As there are scenarios that will (with realistic probabilities) take some schemes beyond an acceptable drawdown level, it’s not surprising that institutional flows into these diversifying investments have increased. So, do you think more investors should be including these strategies in their portfolios? Some caution would be advised – investors commonly aim to predict the impact of the next crisis by using models that have worked on historical data. But the future is rarely a mirror image of the past. Anyone who has witnessed the aftermath of the dotcom bubble or the global financial crisis will attest to that. The strategies that will work best are probably those that recognise that history rhymes, not repeats. Furthermore, some trend-following approaches have been criticised as unsophisticated, being based on simple rules and ignoring the complexity of evolving financial markets. For example, a strategy that naively buys in a rising market may overlook the fact that the market is overpriced. This is not an argument against the strategies as such, but investors should be clear whether the strategy they choose is likely to perform as intended. It seems a very institutional solution, what can smaller investors do if they want to try to build these kinds of exposures into their portfolios? We currently work with several large institutional investors to implement protection strategies via segregated accounts, or as part of a broader, but customised, alternatives allocation. For smaller investors, the options are currently more limited. Through our experience of investing into alternative risk premia strategies, however, we are looking into creating a pooled crisis protection solution that would be a low-cost, liquid, accessible solution for investors across the size spectrum. How would that work? Using our expertise of building portfolios of specific risk premia via investment bank indices, we have designed a portfolio framework using a high-level combination of Trend, Defensive and Volatility- linked strategies. These utilise alternative risk premia across asset classes such as equities, currencies, commodities and rates focussed on areas like quality, low beta, carry and volatility. The principle aim is to deliver very strong returns in periods when traditional asset classes are under extreme stress and in large drawdowns, but to maintain the value of the capital in the interim, more benign, periods. We will certainly be looking out for the details when that fund launches! In the meantime, your Alternative Strategies Fund is selected in the 2017 UCITS Fund of the Year Awards – how do you feel about that? We are incredibly excited to be selected in this year’s awards, and I am particularly pleased to see the hard work of the team being recognised. Launching a fund isn’t easy and Vicky Hudson, the lead PM on this fund has done a great job of bringing this portfolio together in an innovative managed account framework, which has given access to some best-in-class hedge fund talent through a UCITS vehicle that is simply not available elsewhere. As is often the case, there have been some challenging performance periods, but the dedication of the team and the skill of the underlying managers has come through and 2017 has been a successful year for the fund, hence the recognition we have seen! We are incredibly excited to be selected in this year’s awards, and I am particularly pleased to see the hard work of the team being recognised.