CASE STUDY

Multi-Asset Absolute Return and Risk Parity

South East Asian Institutional Investor | Winter 2020

Engagement at a glance

Multi-Asset Absolute Return and Risk Parity

The investor was seeking to invest $100m with one Multi Asset manager via a pooled fund. The objective was to generate absolute returns of 5-6% (net of fees) over rolling 3-year periods, with a risk budget of up to 10% volatility and low-to-moderate equity beta.

Client-specific Concerns

This client was aware of the diversity of approaches within the multi-asset universe (see Seven Shades of Multi Asset). The framing of the search was therefore deliberately broad, with the investor willing to consider a variety of approaches, including Absolute Return Multi Asset and Risk Parity. The paramount of objective – more so than any specific diversification intention – was achievement of the return objective. Some equity beta was therefore acceptable as long as it was dynamically managed.

Outcome

  • A huge variety of strategy types for examination. Given the outcome-focused nature of this search and the investor’s willingness to consider a wide range of approaches, we examined proposals across: Systematic Macro, Discretionary Macro, Alternative Risk Premia, Long-Only Multi Asset, Multi-Manager Alternative and Risk Parity. Within the Risk Parity cohort (10+ of the 52-strong longlist) there was further variety in terms of the asset classes used, the definitions of ‘risk’ used to achieve parity and the nature of active management (part of risk management, or an effort to deliver returns through tactical departures from pure risk parity).

  • Understanding the key differences at manager level. As one may expect from such a varied group, there were substantial distinctions between managers in terms of the dynamism of asset class exposures and risk levels, the use of discretionary versus systematic processes, top-down versus bottom-up portfolio construction and more. The team supported the client in gaining a deep understanding of the various approaches to narrow down the group for further consideration. Favoured strategies focused on the allocation of portfolio risk to trades rather than a ‘capital allocation across asset classes’ investment style.

  • Ultimately, the shortlist remained varied: it included two Macro strategies (one systematic, one discretionary) and three Risk Parity strategies (one with a very pure approach, one with highly reactive risk management, one with highly active tactical positioning using trend and carry signals).

Our specialist says

  • The Multi-Asset space is very diverse, particularly for these ‘outcome oriented’ mandates where a risk/return profile may be stated but the client is otherwise (at least initially) agnostic with respect to the type of strategy or style. A particular complication with the peer group here was the combination of long-only strategies (e.g. risk parity) with clearly more alternative (directionally long / short) strategies.

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