Aquila Capital launches risk parity bond amid fixed income uncertainties

Aquila Capital, the alternative investment manager, has launched a risk parity fund focused on fixed income, as research of 165 pension fund professionals has found considerable levels of uncertainty around the asset class.

The research was carried out in the first week of June 2013, and included views from across Europe. While some 60% of those surveyed said they would maintain or increase exposure to bonds, an even greater proportion, 66%, said that the fixed income market was ‘challenging’ or ‘very challenging’.

The new fund, AC Risk Parity Bond Fund, follows similar allocation principles as the manager’s existing multi-assets AC Risk Parity 7, 12 and 17 funds. It is intended to meet the concerns of those professional investors focused on fixed income, but in light of their expressed concerns.

The fund targets return of cach plus 3%, with annualised volatility of about 3%. It uses a systematic allocation that seeks to diversify across instruments, return drivers, geographies and durations – and relies on four key fixed income assets: government bonds, corporate bonds, carry positions in emerging amrkets, and inflation linked bonds. These assets offer uncorrelated performances with regard to economic and fixed income cycles, Aquila said.

Despite the concerns over fixed income, the institutional investors responding to the research suggested there would be little reduction in exposure to the asset class. Just 19% of those surveyed said they agreed that a ‘great rotation’ is ongoing from fixed income into equities.

Torsten von Bartenwerffer, senior portfolio manager at Aquila Capital, said: “Capital is allocated based on the risk an asset contributes to the portfolio rather than predicted returns and market timing plays no role at all. Instead, the strategy focuses on managing uncertainty through effective diversification between assets that have no correlation to each other and which have various correlations to different phases of the economic and fixed income cycles. Sub asset classes are selected such that as one goes down, one or more of the others will rise.”

Stuart MacDonald, managing director at Aquila Capital, said: “By regulation or desire, many investors will remain exposed to fixed income, but many of them are making little or no return and as our research shows, are concerned about possible interest rate rises. At a time when the outlook for fixed income is uncertain, our strategy offers fixed income investors a truly diversified and liquid counterbalance to their existing exposures, which may be perceived as vulnerable should fixed income markets reverse. Our research shows that Risk Parity is likely to feature in a growing number of portfolios and we believe that investors will welcome the opportunity to benefit from this strategy in the fixed income space.”


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