Investors question regulations on absolute return

At a conference focused on absolute return in Vienna, investors expressed fears that regulators may be ‘overshooting’ and discuss ways out of the low-interest-rate environment.

Austrian investors are increasingly critical of the push for the increased regulatory oversight, as they manage the need for derivatives and absolute return products in portfolio management. “The regulatory environment is even more engaging than the challenge in the markets,” Christian Böhm, chairman of Austrian pension fund APK, told a gathering in Vienna.

Obligations to report documents to the local authorities have gone too far, with regulators “overshooting”, charged Böhm during a panel discussion at the Absolute Return Outlook conference. Absolute Return Consulting (ARC), a Vienna-based consultancy firm that advises institutions such as pension funds organises an annual event involving Austrian investors in absolute return strategies.

Erika Karitnig, chief investment officer at asset manager Bawag PSK Invest, remarked that she has to spend “ever more time” on regulatory requirements, for operational risks and the use of derivatives. “It is difficult to reconcile. As asset managers, we should deliver absolute returns, thus hedging risks actively.”

At the same time, regulators have reservations about the use of some derivatives. Legal uncertainties are adding to market uncertainty. Clients, too, have toughened their stance towards portfolio managers.

“They expect total returns and demand ever more transparency,” noted ­Wolfgang Traindl, head of Private Banking at Erste Group. This is getting more difficult, given the environment of low interest rates. At the same time, many investors still shun the riskiness of equity markets.

Alternative assets, and the use of derivatives, stand out as a possible remedy. “It is increasingly important to actively manage a portfolio via hedging and exposure management, even if regulators don’t like it,” a portfolio manager at a savings bank told InvestmentEurope at the meeting.

Flight to quality

As government bond yields have fallen sharply during the past years, the need for alternative low-risk strategies has increased. Traindl stated: “We have seen this tremendous flight to quality. But actually, looking at expected returns of bonds today, many asset classes do not offer any safety.” With bond yields adjusted for inflation offering negative returns in European “core” countries such as Austria and Germany, absolute return products rightly get increasing attention, Traindl said.

This rings true as Nigel Blanschard, founder of Culross Global, an investor in hedge funds, called 2012 “the year of the arbitrageur” at the meeting.

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