Aquila Capital’s ACQ – Risk Parity Bond fund, a risk parity strategy investing exclusively in fixed income, delivered returns of 4.81% in the 12 months to end-2014, exceeding its targeted return of cash plus 3%.
The fund invests with equal risk weightings across different asset classes within the fixed income space, including government, corporate and inflation-linked bonds and emerging markets, the company said.
The asset classes were chosen based on their performance in different interest rate and economic cycles with the aim that at least one asset class held within the portfolio will perform strongly in each cycle.
The fund remains invested in the other asset classes at all times as they provide valuable diversification benefits. “Returns are therefore not achieved by tactical allocation changes but by combining asset classes that have a low correlation with one another and by systematically capturing their long-term returns,” the company specified.
Torsten von Bartenwerffer, head of Strategies and Portfolio Management in Aquila Capital’s Quant Team, said: “The convincing performance of our Risk Parity Bond strategy illustrates the success of a risk parity approach to fixed income. The recent implementation of a quantitative risk management system further strengthens the Fund’s ability to navigate difficult market conditions and underlines the importance of adopting new approaches to address the issues and opportunities created by the evolving fixed income market.”
Aquila Capital introduced a quantitative risk management system to the fund process in the autumn of 2014 in order to reduce the impact of negative market phases, which are often triggered by episodes of rising interest rates and can result in a sudden spike in correlation across asset classes.
Key functions of the risk management system include:
- It aims to reduce the impact of negative market phases on performance by rapidly removing risk from the portfolio during such phases. There is no change to the underlying strategy of the Fund, which remains aimed at investing in assets that offer long-term premia.
- It analyses the realised downside risk across asset classes over time. When the losses in a single asset class exceed their typical level by a substantial margin, the asset class is flagged as being in distress.
- When at least two of the four asset classes in the Fund are in distress, the risk management system generates an exit signal.
Torsten von Bartenwerffer added: “The risk management system increases the likelihood of recognising risks earlier and thereby limiting losses significantly. This makes the portfolio even more robust against interest rate fluctuations and spikes. We expect that this step will further improve the performance of the Fund, particularly during difficult interest rate markets.”