• Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic
  • Events
  • Market Intelligence
  • Investment Week
  • ESG Spotlight
  • Thematics Spotlight
  • Newsletters
  • Sign in
    • You are currently accessing Investment Europe via your Enterprise account.

      If you already have an account please use the link below to sign in.

      If you have any problems with your access or would like to request an individual access account please contact our customer service team.

      Phone: +44 (0) 1858 438800

      Email: [email protected]

      • Sign in
     
      • Account details
      • Newsletters
      • Contact support
      • Sign out
     
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
  • Register
  • Events
    • Upcoming events
      event logo
      Women in Investment Festival 2020

      Investment Week, Professional Adviser, Professional Pensions, Retirement Planner and Investment Europe have collaborated to launch the Women in Investment Festival 2020, in partnership with HSBC Global Asset Management.

      • Date: 03 Mar 2020
      • The Brewery 52 Chiswell Street London EC1Y 4SD, London
      event logo
      Milan Forum 2020

      InvestmentEurope's 10th annual Milan Forum will take place on 5th March at the Four Seasons Hotel, Milan.

      • Date: 05 Mar 2020
      • Four Seasons Hotel Milan Via Gesù, 6/8, 20121 Milano MI, Italy, Milan
      event logo
      Nordic Summit Stockholm 2020

      InvestmentEurope's Nordic Summit 2020 will take place on 10-11 March at the Grand Hôtel Stockholm.

      • Date: 10 Mar 2020
      • Grand Hôtel, Stockholm Södra Blasieholmshamnen 8 103 27 Stockholm Sweden, Stockholm
      event logo
      Frabelux Forum 2020

      The 3rd edition of the Frabelux Forum will be held on Thursday, 19th March at the Ritz Hotel in Paris

      • Date: 19 Mar 2020
      • The Ritz, Paris
      View all events
  • Investment Week
  • ESG Spotlight
  • Thematics Spotlight
Investment Europe
Investment Europe

Sponsored by

Sharing Alpha
  • Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic
  • You are currently accessing Investment Europe via your Enterprise account.

    If you already have an account please use the link below to sign in.

    If you have any problems with your access or would like to request an individual access account please contact our customer service team.

    Phone: +44 (0) 1858 438800

    Email: [email protected]

    • Sign in
 
    • Account details
    • Newsletters
    • Contact support
    • Sign out
 
  • Equities

Finding true uncorrelated returns in a crowded world

Finding true uncorrelated returns in a crowded world
  • Oliver Dobbs
  • 20 November 2019
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  

Large pools of capital have transformed the hedge fund world. An ever-deeper institutional presence has meant hedge funds are no longer viewed as solely an alpha-driven quest for high returns. What perhaps is more prized by institutions is the delivery of true uncorrelated returns.

The hedge fund and alternatives industry has duly responded. Investors now have access to myriad strategies with different approaches to unearth uncorrelated returns. However, therein lies a problem: if everyone is uncorrelated, then it follows that no one is.

Related articles

  • Arbitrage opportunities in the age of machine-made volatility
  • Alpha hunt: Strategies that will harness volatility in 2019
  • The diminishing world of uncorrelated returns
  • Unigestion’s CEO comments on hedge fund manager selection

So, what is the ultimate acid test for an uncorrelated returns manager? I would argue the truly uncorrelated manager can wake up to a world of hellfire and crumbling markets with a detached air, clinically dissecting opportunities amid whipsawing volatility.

Volatility test
The problem is the proof lies in the investment pudding. Only when strategies are put to the white-hot flame of wildly oscillating markets can we truly analyse whether they are adding uncorrelated diversifying power to investor portfolios - and indeed, whether they can still deliver a consistently high return through market squalls.

When volatility strikes, fund managers quickly find out whether they are prey or quarry. For true non-directional managers, resurgent volatility should be a time to capitalise. Relative value arbitrage in particular thrives on volatility. The more the shares bump around, the more opportunities arise to adjust the delta-neutral hedge and unlock alpha. Indeed, single stock volatility can often be a primary driver of returns.

This is not to say volatility will not create disruptive complications. For example, an arbitrage strategy needs to effectively absorb and impact the rate of new issues, which, like London buses, unfortunately tend to arrive in bunches. For example, the month of August saw an unusually large new issue calendar of $8.9bn, mainly in the US. With some 15 deals, this was the busiest August ever and the market had to absorb all the new issues.

Structural headwind
September was a month dominated by the new issue calendar. The US issued 19 deals for a total of $13.3bn. This was too much for the market and drove prices lower. As business uncertainty grows, we hope to see an uptick in individual stock volatility, where we are long. Broad markets continue to appear vulnerable.

Moreover, a relative value arbitrage strategy has heightened appeal for investors seeking uncorrelated returns against a backdrop of increasing financial market regulation. Banks, no longer able to take as much risk on their balance sheets, are willing to overpay for complex credit products in order to reduce their risk-weighted assets.

We are also operating in an era of unprecedented structural change in the banking industry. As proprietary trading desks have wound down, this has led to sustainable, exploitable arbitrage opportunities.

With less traders actively accessing ideas, the opportunities to source alpha via non-siloed, low volatility and liquid non-directional trades has grown. This is a universe of uncrowded trades and it is possible to create a strategy that is extremely difficult to replicate, as well as inaccessible to big data and quant funds.

Compound wisdom
Of course, it helps if you have successfully ridden out a few cycles. Compounded wisdom allows for a better assessment of where real risk is building up in the system, and where to find easy-to-access liquid trades.

It is not quite the summer of 2007, but events are beginning to rhyme. Stocks are becoming more and more sensitive to news flow and adding to a volatile confluence of macro winds is the commoditisation of quant factors via smart beta and a pervasive algorithmic presence generating even greater correlations. The market is prone to deep shocks that appear to come out of the blue. The September momentum plunge was a warning of what lies ahead. 

However, an uncorrelated investor should never recoil in horror at the violent swings of the bond and equity markets. The hedge fund world does provide uncorrelated returns; one just needs to know where to find the uncrowded spaces.

Relative value arbitrage is one source of true uncorrelated return that allows investors to build non-directional positions in companies involved in a wide range of corporate transactions, from shareholder buybacks to corporate restructuring or other capital structure adjustments. The advantage lies in understanding the universe and capitalising on dislocations to unlock alpha.

Oliver Dobbs, CIO of Credere Capital

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Equities
  • Fixed Income

More on Equities

Latin American AUM will more than double by 2025: PwC report

  • Equities
  • 10 December 2019
Lindsell Train Global Equity fund continues lead of most highly rated on SharingAlpha

  • Equities
  • 10 December 2019
Head to Estonia should you wish to earn more than men as a self-employed woman

  • Equities
  • 10 December 2019
Morgan Stanley hit with €20m fine for OAT, OLO price manipulation

  • Fixed Income
  • 10 December 2019
Does gating funds harm the European fund industry?

  • ETF/ETP
  • 10 December 2019
Back to Top

Most read

Swiss regulator proposes sanctions against GAM for not disclosing liabilities
Swiss regulator proposes sanctions against GAM for not disclosing liabilities
Deutsche Bank unveils ESG multi-asset fund exclusively in Spain
Deutsche Bank unveils ESG multi-asset fund exclusively in Spain
PGIM Investments makes Benelux, Switzerland and UK push
PGIM Investments makes Benelux, Switzerland and UK push
Thematics AM CIO, CEO outline investment objectives
Thematics AM CIO, CEO outline investment objectives
AB strengthens Swiss distribution team
AB strengthens Swiss distribution team
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading