Posted inAlternatives

Use non-mainstream assets when conventional ones don’t cut it

However, many investors are often structurally limited in their choices.

Zurich-headquartered GAM is well known for its wide range of alternative funds but, as Daniel Durrer, head of institutional and fund distribution for continental Europe and Latin America, points out, many investors on the institutional side are simply excluded from several very specific asset classes.

“For instance, technically, most institutions in Germany cannot buy catastrophe bonds because the asset class doesn’t comply with local regulation.

“The classification and rating of these bonds doesn’t match their investment guidelines and so they struggle to go into these more unusual fixed income products.”

But one thing that institutions are more likely to have is flexibility when it comes to liquidity because their timescales are quite different from most wholesale investors.

“They can cope with this liquidity profile,” says Durrer. “They can deal with having money locked up for six, eight or more years.

“The interest from institutional investors in strategies that are actually straight forward but just happen to be illiquid – private equity, private debt, real estate, infrastructure– has been high.”

Until recently, GAM had not been in that space. Then, a couple of years ago it acquired Renshaw Bay, which runs commercial real estate debt. It is a UK product but they are about to launch a second in the UK and a mainland Europe version to tap into this interest.

Durrer thinks the efforts of other product providers to give wholesale investors access to these sorts of illiquid products has had some success. However, he says to change the liquidity from years to months, making them digestible for the typical private client, there must be constraints in terms of limited capacity, or access only to very specific tranches.

When it comes to hedge strategies, GAM has seen a strong demand for strategies with steady performance, as investors place increasing value on security and diversification.

“Not that anyone would take 50% of their fixed income allocation to hedge funds no matter how steady but I think they are happy to add a similar risk profile to achieve a good diversification.”

GAM launched a merger arbitrage product a few years ago with a manager from Allianz. It has attracted a lot of interest because performance has been very steady, with volatility around 2/2.5%

“We also have a number of global macro products,” he says. “One specialises in rates and FX. That was a blockbuster a couple of years ago. That is in the 6-8% range, so it’s for people who want to use it in a diversified portfolio, not a standalone position.

“We have also had unconstrained bonds for a while. They haven’t had a very easy environment but now their performance has picked up again. If you look at the challenges of the environment, giving your manager the capability to manage the assets as they want is probably the best approach.”

What is interesting is that while they have three risk grades in unconstrained bond strategies, the highest risk is getting all the attention. It stands to reason that while fixed income is returning so little, investors are going for the spiciest version.

Something different

One set of strategies that stands out for Durrer as being the most interesting in recent times, and that GAM has bought into in a big way, is alternative risk premia.

“It fits between traditional beta and alpha,” he says. “This gets a lot of attention from the absolute return buyers because you get good liquidity and transparency and access to attractive, uncorrelated returns at quite a low price.”

To move more into the quantitative space, GAM bought Cantab Capital Partners in Cambridge. At the time of purchase they were running a typical multi-strategy quantitative model based approach underpinned by a robust and unique tech platform.

GAM’s alternative risk premia strategy was in place prior to the acquisition of Cantab and the launch of GAM Systematic.

“I think alternative risk premia and other systematic investing products are going to stay for a while,” says Durrer.

“Clients are increasingly interested. If we go out with educational events, the ones where we talk about machine learning and artificial intelligence get many more people present in one room than any other topic.”

New approach

One of the reasons why people are interested is because it is genuinely different from the rest of the industry.

“If you look at the people working for GAM Systematic in Cambridge, they are totally different from those working in any other investment firm,” says Durrer. “Within typical investment firms you expect to see people with an investment background, who have traded equities, been in research, etc.

“But in the systematic investment places you have mathematicians. In GAM Systematic’s Cantab team, probably half of them have PhDs from Cambridge and come up with these great ideas about how to manage money for clients. It’s very impressive and a totally different approach.

“At first we launched a systematic macro fund in Ucits format and a systematic equity market-neutral fund,” says Durrer.

“They performed extremely well this year. The macro fund is in the double digits and there are probably not many macro funds out there in double digits because most of the trend followers had a tough time up to late October 2017.

Open options

So, can these systems be used for mainstream assets? Absolutely, says Durer.

“They have the capabilities and research power to develop new approaches to anything,” he said.

“It could well be that, in the future, we are going to be running long-only products by the same team, with additional features such as tail-risk protection and maximum drawdown.”

That could be very appealing to end-investors, since instead of needing three or four European equity managers to give some diversification, you might just need one active and one systematic.

“Of course, you have to have enough data to support your approach and you have liquid instruments to execute it,” says Durrer.

“They use futures and options – very, very liquid instruments. So as long as you have a big enough universe of data, there’s no reason why we shouldn’t be able to do long-only type strategies.”

So, it seems the skills you learn from going off the beaten track can then be used to build a vehicle that not only allows you to drive on a motorway with the rest of the fleet but must be robust enough to survive the inevitable crash.

Dylan Emery

Dylan Emery is the group editorial director of Last Word. He is one of the founders of the company and he created International Adviser, Portfolio Adviser and Expert Investor. His primary responsibilities...

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