At a time when valuations are looking stretched across major asset classes and sell offs are far from rare, the main challenge facing investors is how to generate returns. Traditionally, investors turned to equities for growth and fixed income for stability. However, experimental monetary policy, disappointing bond spreads and negative yields on $13.4 trillion of sovereign and corporate bonds globally are challenging convention.
It is little wonder that there has been more interest in multi-strategy investing of late in attempts to provide the investment outcomes desired whether financial markets are rising or falling. One of the main ways that multi-strategy approaches can meet their objectives is by moving away from the index benchmark-driven culture that holds sway over much of the investment industry and leads to short termism. When properly implemented, multi-strategy investing allows managers to access almost unlimited investment ideas in seeking to profit from rises or falls in asset prices.
That is not to say that successful multi-strategy investing is easy. It is complex and requires expertise in derivatives trading, risk management and portfolio construction in addition to a broad range of areas such as equities bonds, currencies and volatility. For example, currency exposures accounted for around half of our target-return portfolios’ overall return and around a quarter of its risk in 2015 .
The focus on assessing potential investment ideas over a three-year period is a central to success here. This means a well-implemented multi-strategy approach can be less susceptible to fluctuations in financial markets and economic expectations than ‘long-only’ approaches.
Our multi-strategy portfolios combine three types of strategies – ‘market’, ‘opportunistic’ and ‘risk-reducing’. Each of the three plays a different role and in combination helps managers to achieve their objectives. The first group seeks to provide a positive return when markets perform as we expect. The second aims to exploit opportunities arising from market inefficiencies. The last one provides a performance stabiliser, aiming to boost returns when markets do not behave as anticipated without harming performance when they do.
Market strategies offer a host of opportunities to profit from the direction of say European shares, rates or US inflation expectations. They harvest the risk premia from asset markets where our view differs from consensus. For instance, European equities remain one of our most favoured markets. So, one market strategy looks to profit from beneficial effect very loose monetary policy is expected to have on valuations.
As investors mull the timing of the next rate hike by the US Federal Reserve, prospects for the Chinese or US economies and forthcoming election results in America and Europe, volatility spikes look certain.
Unlike ‘long-only’ managers, multi-strategy ones don’t need to go into hibernation during sell offs. Instead, managers can remain focused on capturing potential sources of return, whichever way the wind might blow.
Brendan Walsh is multi-assets fund manager at Aviva Investors