Liquid alts, CTAs and risk premia: What went wrong?
There were more questions than answers in a panel discussion on “Liquid alts, CTAs and risk premia: What went wrong?” at the Fiduciary Investors Symposium with the audience questioning whether there was too much beta in liquid alts and if clients really understood the products.
Panellists said it was vitally important for investors to “align their expectations with reality” when investing in such products.
Steve Shepherd, head of Asia Pacific at CFM said it was important for investors looking at these strategies to understand what risks they are taking, the expectations about volatility and what expected returns could be.
Similarly, Neil Williams who is chief strategist in the global multi-asset team at QIC said context was important.
“Most of these strategies have good historical performance and good academic backing for why they should exist,” he said. “But there is a lot of dispersion.”
Importantly they said the dispersion in results comes from portfolio construction and how the portfolios are put together.
“Even within a single sleeve, like equity low beta, these strategies can be put together in very different ways. When the portfolio is put together the devil is in the detail. Look at how it is put together and the portfolio construction and risk management approach.”
Williams, who said it was an unusual year last year, urged investors to have good diversification across factors and allocate to factors according to their confidence.
AMP Capital has invested in the asset class for about five years building a program from the bottom up. Debbie Alliston, chief investment officer of the multi-sector group at AMP Capital said until the past 18 months the team was happy with what had been achieved.
“We never thought we were buying a hedge, we thought we were buying a diversifier. We understood what we were buying, it was risk premia in a systematic way, we had been paying more for it through our hedge fund program so we wanted to pay less,” she said.
“The main thing is that when you have negative returns that you can explain them. To me what has happened over the past 18 months is explainable so that gives me comfort.”
Alliston agreed that different managers have different portfolio construction and risk management approaches which contributed to the dispersion in returns of what may have looked like the same products. AMP Capital now employs three managers for risk premia mandates.
“When we put them together the correlation was pretty much zero. They behave very differently, and we like that,” she said.
Speaking from the floor, Robert Graham Smith, senior investment analyst at Mine Super said he had been looking to allocate to the asset class over the past 18 months so had examined a lot of managers.
Demonstrating the huge dispersion in returns, Graham-Smith said last year the worst performing fund he saw returned -22 per cent and the best was 4 per cent.
“It depends on the volatility being targeted,” he said.
For Mine Super, diversification was a driver for the fund in approaching the space.
“It was important to see what we already had exposure to that we didn’t want more of,” he said.
He also agreed that there is no universal definition of some of these premia and so there are many ways to implement them.
“Portfolio construction is really important for us so we look for managers with strong risk management,” he said.
Graham-Smith also said a “healthy dose of paranoia” was important.
“We are trying to harvest some pretty skinny risk premia and often using a fair bit of leverage so you have to be careful how you do it,” he said.
Mine Super has made two allocations about 18 months ago and he said the results “have been fine” and that the managers have outperformed the majority of the peer group, which had a mixed year in 2018.
AMP Capital’s Alliston told delegates at the conference it was important to trust your manager.
“You need to stay close to the strategy and ask questions, and be comfortable the manager is not asset gathering. A strong research capability is something we have looked for,” she said.