CASE STUDY

Alternative Risk Premia

Australian Institutional Investor | March 2019

Engagement at a glance

The investor sought a comprehensive review of the alternative risk premia manager landscape with a view to investing approximately AUD300m with a single manager via a separately managed account targeting a return of cash plus 4% per annum and a corresponding volatility level of 6-8% p.a. with daily liquidity.

Client-specific Concerns

In contrast to a number of recent bfinance searches where mandates have been for new allocations to the space, this asset owner already had existing ARP exposure. As such, suitable proposals not only had to meet client requirements, but also demonstrate complementary behaviour to the existing ARP allocations; both in terms of investment process and the resulting risk/return profile. The client was open to considering all styles of ARP strategy covering both the academic premia space and those strategies that incorporated more esoteric ‘practitioner’ premia, with no specific strategy restrictions or preferences noted upfront other than a requirement for broad equity market neutrality (beta < 0.2) at the overall portfolio level.

Outcome

  • Given the client had existing ARP allocations, they felt enough comfort with the space to consider less established proposals with shorter track records and lower AUM levels; often the most binding constraints in terms of reducing the eligible manager universe. As a consequence, the search attracted a very high level of interest with 40 proposals received.

  • Although comparatively unrestricted in terms of investment process, the client had specific requirements around fund structure and reporting transparency and format. For a mandate of this size the provision of an SMA (separately managed account) was not an issue for participating managers, however a number of managers were unable to meet the client’s reporting requirements, or could not demonstrate the required level of experience for a client of this type.

  • Fees were also a key area of focus for the client. As an existing allocator to ARP strategies they had a solid understanding of the expected range of fee proposals, and as with the majority of ARP allocators, had a strong preference for a flat management fee structure over a performance fee model.

  • Internal fee budgeting requirements meant the client was subject to constraints on maximum management fees. This was sufficient to exclude a number of higher fee managers irrespective of their value proposition, necessarily focusing the suitable investment processes towards the more classic academic premia strategies and away from the ARP meets quant multistrategy hedge fund boundary. However, the breadth of available ARP styles meant that this constraint did not adversely affect the eligible manager universe.

  • 14 proposals were selected for detailed second stage analysis which focused on the key areas of firm and team capability and pedigree, investment and risk processes, and therein risk premia definitions and portfolio construction with a particular focus on aspects that differentiated them from the incumbent ARP manager. Implementation efficiency in order to implement portfolios with minimised market impact was also a key consideration, as was the quality of client servicing and reporting. Ultimately this led to 4 managers being seen for face-to-face due diligence, with one manager ultimately being awarded the mandate.

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