Liquid alternatives managers are not all the same

Rachel Alembakis

By

09/10/2018

Investors are implementing alternative risk premia strategies, such as liquid alternatives, for a variety of reasons. As a wide dispersion of returns has shown, the sector is not homogenous.

Addressing the audience at the Investment Magazine Absolute Returns Conference, Neil Williams, chief strategist, global multi-asset team, at QIC noted that the fund manages a liquid alternatives strategy inhouse, and also uses external managers for alternative risk premia strategies, including liquid alternatives. Williams said clients discussing liquid alternative strategy with QIC say they seek total absolute return or defensive strategies but also portfolio completion.

“By that I mean …  looking through your portfolio and identifying, ‘Yes I have a lot of FX carry through my Australian dollar position, I have quality in my equity portfolio, but I don’t have any momentum’, or ‘I don’t have any volatility premium,’ ” Williams said.

In his experience, Williams has seen investors targeting specific characteristics, and use various alternative risk premia strategies like liquid alternatives to “complete” the overall strategies.

QIC’s growth fund is a mix of growth and defensive assets. Liquid alternatives play a part in the growth fund. “The Liquid Alternatives fund that we manage [for the growth fund] has a return objective of around cash plus 4 per cent [per annum], volatility of around 6 per cent [per annum] and an equity beta of less than 0.1.”

Celine Kabashima, portfolio manager, multi-asset group at AMP Capital Investors, said the firm allocates to liquid alternative risk as a complementary strategy, in an overall fund that is targeting call plus 5 per cent to 7 per cent, with volatility characteristics between 8 per cent and 12 per cent.

Liquid alternative risk strategies may seem a homogenous category, but the variance in manager returns belies that reputation, Kabashima said.

“I think this year has been a great testament to how actually not-homogenous the space has been,” she said. “Not only in terms of performance, but when you dig into the next layer, you can see that the managers are slicing and dicing and implementing strategies in different ways, and touching on the performance side, this year, dispersions on returns have been between minus-10 per cent or more and 3 per cent to 4 per cent. That’s quite wide for a strategy that’s all the same, doing very similar things.”

The key is to look at underlying biases of the funds and compare sector and style biases, she said.

“As we all know, equity value has been a big drag, and you can tell right away which managers have had a large exposure to equity value and how that’s impacted the portfolio,” she said.

Scott Pappas, senior portfolio manager, opportunistic growth at Cbus Super, noted that the target return is cash plus 5.5 per cent with “a low volatility to equity  moves” for his fund. Cbus Super is in the process of implementing a liquid alternative strategy.

Pappas echoed Kabashima by agreeing that liquid alternatives managers are not one and the same, and figuring out which ones are correctly implementing decisions is part of their selection process.

“But then there’s also the concept of targeting 10 per cent volatility in these funds. So from time to time, you’re going to lose money and it’s going to look pretty ugly,” he said. “We spent a lot of time on thinking about that and what it looks like and how we mitigate that risk. Is it better to add a sixth, uncorrelated risk factor to the process, and how do we get that? Is that somethings like a discretionary global macro manager? Is it some sort of short-term trading? That dispersion of returns, that volatility and the time series of returns is something we care a lot about and spent a lot of time thinking about.”

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