Volatility puts absolute returns centre stage, Natixis seminar suggests

The Absolute Returns Investment Seminar, hosted by Natixis Global Associates, the international distribution arm of Natixis Global Asset Management, heard arguments for the role of this type of strategy.

Against a macroeconomic backdrop of rising inflation and economic growth that is stagnant at best, delivering positive returns is a major challenge. Relative returns simply do not meet liabilities in this current environment and investors need carefully understood, innovative solutions to achieve absolute returns as part of building durable portfolios, said Terry Mellish, head of UK/Ireland business and global consultant relationships, Natixis Global Associates.

Absolute Risk Management

Most asset managers are focused almost exclusively on risk relative to their benchmarks but a manager’s risk relative to their benchmark can sometimes be dwarfed by the risk associated with the benchmark itself, said Jerry Chafkin, President and CEO of AlphaSimplex Group.

Benchmark risk has traditionally been managed at the portfolio level through diversification and strategic asset allocation but the latter is typically determined through portfolio optimisation which assumes return, risk and cross-asset correlations for each asset class benchmark are stable over time. This is not necessarily the case and managing whole portfolio risk through volatility overlay strategies is a key first step in the pursuit of absolute returns, he added.

Risk-Adjusted Alpha

Risk-adjusted alpha is the cornerstone of global macro absolute returns strategies, as quality and level of risk are fundamental to alpha generation. As a result it is important that investors realise absolute return strategies are applicable to longer term investment. For example extreme market movements, whilst sometimes impacting immediate returns, can create major opportunities for absolute return strategies over longer time periods, commented Bruno Crastes, CEO of H2O Asset Management.

Fixed Income

Fixed Income presents numerous opportunities for alpha generation, resulting from the diversity of strategies on offer. Of particular note to delivering absolute returns is the wide range of betas available within fixed income, many with negative correlations to each other. Thus effective hedging mechanisms are easily employed to deliver absolute returns or alpha, said Jae Park, CIO, Loomis, Sayles & Company.

Tail Risk

Investors continue to seek absolute returns, but rising correlations across asset classes and geographic regions have led them to become increasingly concerned about event risk and the damage it can do to their portfolios. One way to achieve absolute returns while mitigating tail risk is through a hedged equity approach. It enables investors to retain equity exposure, but at a reduced risk, said Patrick Rogers, President and CEO, Gateway Investment Advisers.


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