Are alternatives the right alternative?
Investors' appetite for absolute return strategies remain high despite latest losses agree Iberian fund selectors.
Global economic outlooks from biggest asset managers seem to agree that a background of increased volatility will be an important feature of both equity and fixed income markets in 2019 and that seeking for investments aimed at diversifying away from traditional asset classes might be key on investors' agendas.
Central banks' intervention over markets, an increased correlation between the different asset classes, a prolonged environment of low volatilities, the lack of clear continuous trends and some abrupt sectorial changes can partly explain the bad performances of alternative strategies.
For many alternative managers, providing portfolio diversification has been challenging over the past year, but, why? Where should they seek diversification?
Ricardo Líbano, fund selector at Lisbon-based IM Gestão de Ativos believes that alternatives are likely to attract more investors in 2019. "Our flows analysis shows that the appetite for alternative strategies has been growing and there is no evidence to believe this trend will stop. The current market environment, after years of bull markets in both the fixed income and equity space, has led investors to seek different sources for return, and the alternative space should be a fertile ground to find not just different but also, uncorrelated sources of return".
Celia Benedé, who leads the fund selection team at Barcelona-based Caja Ingenieros, explains how her team has been investing in alternative strategies since 2004."In general, the search for de-correlation with traditional assets, the importance of capital preservation and some theories related to portfolio optimisation, led us to admit that alternative management strategies were good allies of any portfolio. Also, the low interest rates environment of recent years, with an asymmetric risk to the upside, has made alternative management more attractive compared to fixed income within the most conservative investments.
"However, the market situation, particularly in the past year, has proved how difficult is for absolute return strategies to achieve their targets. Nevertheless, we will continue including these strategies in our portfolios although we believe investors will be much more demanding and selective when picking funds as well as when considering their optimal weight."
César Gil, head of Fund of Funds at Bankia Asset Management, says that from the wide range of absolute return - including event-driven, global macro, CTAs, merger arbitrage, or long-short strategies among others - each of them performs better in different times of the market cycle, even they can be combined for diversification. "At Bankia AM, we use these strategies to obtain some extra alpha, with less beta, seeking to improving the binomial risk-return in our portfolios."
César Ozaeta, head of fund selection and fixed income specialist at Abante Asesores, says his team normally favours long short strategies over CTAs, even more when they are sectorials.
"Investors' appetite for this sort of strategies remain high despite reports of widespread underperformance. I think this is because their goal is very attractive since they are supposed to generate alpha in all market conditions, with a low correlation to the rest of the portfolio that can provide the diversification that investors seek in periods of market stress.
"Although this sounds very attractive, it is very difficult to be achieved and even more difficult to explain to clients when it is not achieved."
Andrea Profeti, senior investment fund adviser at Indosuez Wealth Management, considers the bad performances of absolute return are in line with the underperformances experienced by most asset classes recently with data suggesting that 90% of asset classes have underperformed in 2018. "A flexible investment style becomes essential to navigate choppy waters".
ASSESSING LONG-TERM PERFORMANCES
"In the past years there have been just a few AR strategies providing alpha, which I believe it is because many fund managers have started to run this type of strategies not having the ability to navigate in market stresses. This is why I consider essential to look at long-term performances when selecting AR managers/ strategies," explains Profeti.
Gil continues: "That fund managers have not offered alpha with absolute return strategies during this year is a fact. However, some of these strategies like long short funds were already underperforming in previous years.
"What we should be asking ourselves is whether there is alpha in the selected managers or if the problem relies on the fact that AR managers follow the same parameters and these are wrong.
"However, we truly believe that alpha can be added to funds through the right managers' selection, as long as they have been consistent and loyal to their management style. One year's performances is not enough to assess alternative management."
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