Absolute Return, Liquid Alternatives
Engagement at a glance
This Wealth Manager sought to identify multiple liquid alternative managers to broaden their existing roster of alternative strategies. These new allocations were expected to provide diversification against their existing managers while also being attractive on a standalone basis.
Target return: 4-6% p.a. (EUR basis) with an equity beta of 0.3 or less and a diversified investment universe by both asset classes and geography. With the client focusing on “outcome” the investment style was intentionally left undefined for this search, throwing a wide net around various liquid alternatives.
The primary motivation for this client was to enable diversification away from equity risk in a climate where fixed income is less attractive from a yield and risk perspective. As a client that has its own client base, they were also keen to expand the range of offerings available to their own investors, while avoiding overlap within any specific sub-strategy.
As well as the aforementioned outcome-oriented requirements, there were also quite specific requirements around reporting transparency, fund structure and liquidity (at least monthly dealing).
The primary objective here was to keep the scope intentionally broad and not be pigeonholed into a specific strategy type. This would allow the client to consider the widest possible range of options from large well-established firms as well as the smaller boutique firms that would otherwise go under the radar.
- A full review of the broad manager universe produced a wide range of offers (62) across 8 strategy types including but not limited to Alternative Risk Premia, Event Driven, Diversified CTAs, Multi-Strategy, Systematic Macro, Market Neutral and Credit & Fixed Income Arbitrage. The liquid alternative space is a diverse and complex arena that has expanded considerably since the GFC. Thorough cross-examination of the appropriateness of these strategies versus the clients’ needs, both qualitatively and quantitatively through cluster analysis techniques, narrowed the field to nine. These spanned true multi-strategy, diversified event driven & diversified CTA approaches.
- In-depth analysis focused on the qualitative aspects of each strategy. Idea generation and analysis, the diversity of alpha sources and underlying return drivers, how portfolios are constructed (approach to position sizing, forced diversification, embedded risk considerations) and risk management were all key.
- Ultimately, the favoured strategies were a blend of systematic and discretionary approaches that were able to evidence the use of multiple return drivers as opposed to being over reliant on one aspect. For example, within the Event Driven universe, the ability to combine both hard and soft catalyst opportunities was preferred. The final five managers came from three distinctly different strategy groups.